Insurance Company Membership in the Federal Home Loan Banks

Transcription

1 Insurance Company Membership in the Federal Home Loan Banks Matt Feldman President & CEO Federal Home Loan Bank of Chicago November 5, Federal Home Loan Bank of Chicago Member owned. Member focused. Presentation Title October 29,

2 LEGAL DISCLAIMER Certain information included in this presentation speaks only as of a particular date or dates included in this presentation. The information in the presentation may have become out of date. The Federal Home Loan Bank of Chicago (FHLBC) does not undertake an obligation, and disclaims any duty, to update any of the information in this presentation. The risks, uncertainties, and factors that could affect the FHLBC and its financial results are discussed more fully in the FHLBC s reports filed with the Securities and Exchange Commission, which are available on Mortgage Partnership Finance, MPF, MPF Xtra, Downpayment Plus Program, and DPP are registered trademarks of the Federal Home Loan Bank of Chicago. Community First Fund is a trademark of the Federal Home Loan Bank of Chicago. The data, scenarios and valuations provided to you in this presentation are for information purposes only and are provided as an accommodation and without charge and are not intended for further distribution. The data, scenarios and valuations are estimates only and may not represent the actual or indicative terms at which new (or economically equivalent) transactions could be entered into or the actual or indicative terms at which existing (or economically equivalent) transactions could be prepaid, terminated, liquidated, assigned or unwound. The scenarios and valuations were derived using proprietary pricing models and estimates and assumptions about relevant future market conditions and other matters, all of which are subject to change without notice. The scenarios and valuations were prepared without specific information about your institution s balance sheet composition, hedging strategies or financial assumptions and plans, any of which may affect the relevance of these valuations to your own analysis. The Federal Home Loan Bank of Chicago makes no representations or warranties about the accuracy or suitability of any information in this presentation. This presentation is not intended to constitute legal, accounting, investment or financial advice or the rendering of legal, accounting, consulting, or other professional services of any kind. You should consult with your accountants, counsel, financial representatives, consultants and/or other advisors regarding the extent these scenarios and valuations may be useful to you and with respect to any legal, tax, business and/or financial matters or questions. 2

3 The Federal Home Loan Banks An Overview The 12 FHLBs provide wholesale liquidity and term funding to nearly 7,500 member insurance companies, banks, thrifts and credit unions across the country. As GSEs, the FHLBs have excellent access to the global capital markets, providing competitively priced funding in all cycles. Each FHLB is a cooperative owned by the member institutions within its district. Each has separate management and boards of directors, but are jointly and severally liable for each others debt. The FHLBs are significant contributors to affordable housing and economic development initiatives in their districts. 3

4 How the FHLBs Work Advances Investors FHLBs Collateral Members Debt Securities Investment Capital Issuance Proceeds Mortgage Lending & Community Investment Dealers Debt Securities Issuance Proceeds Office of Finance Homebuyers FHLBs serve as financial intermediaries channeling funding from the global capital markets to members institutions to support housing finance and economic development activities in their districts. 4 Source: Office of Finance

5 Benefits of FHLB Membership Key Differentiators Optimize Cost of Funding Enhance Liquidity Management Expand Risk Management and ALM Options Access long-term funding at competitive rates that reduces weighted average cost of funds Reduce cost of funds by retiring high-cost debt Access reliable same-day liquidity that has been proven through many business cycles Reduce cash and short-term liquidity balances, optimize investment mix and enhance yield Improve daily cash management and through convenient open lines of credit and shortterm advances Manage interest rate risk and basis risk in loan, security, and servicing portfolios through customized advance products Stabilize earnings and enhance Asset Liability Management (ALM) through accountingfriendly funding structures Enhance ROE by funding/growing portfolios loans and investments Partner in Social Goals Leverage FHLB grants for Affordable Housing Program projects in your community Promote economic development through FHLB s community investment products 5

6 FHLBs Added Much-Needed Liquidity During Crisis FHLB Value Was Demonstrated During the Financial Crisis 1,100 1, $377B FHLB System Borrowings Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Source: FHLB System Financial Statements 6

7 Insurance Members Are Increasing Their Borrowings Source: Statutory Financials 7

8 Rating Agencies Recognize Value of FHLB Membership System has proven to be a stable source of funding through good times and bad. S&P Ratings: How FHLB Funding Figures In Ratings on Insurers Under our criteria for government-related entities, we rate FHLB debt (AA+/Negative) equal to the sovereign rating because of our view that the federal government would almost certainly provide extraordinary support if needed We believe the FHLB will be able to meet members borrowing needs during the next market dislocation, providing relatively inexpensive funding for illiquid assets when members have few funding alternatives. Fitch Ratings Insurance Outlook for FHLBanks The FHLBanks provided needed liquidity to the banking and insurance industry during the financial crisis, allowing them to turn their somewhat illiquid mortgage portfolio into funds that could be used to finance operations without forced asset liquidation. Source: S&P Ratings Direct (May 15, 2013), Fitch Ratings Insurance Outlook for FHLBanks (June 12, 2013) 8

9 FHFA s Proposed Rule On FHLB Membership Summary Requires on-going asset test, calculated annually, to remain members. For insurance companies: 1% of assets in home mortgage loans, but alternatively contemplates a 2% or 5% requirement. Expands definition of home mortgage loans to include all types of MBS backed by qualifying whole loans and securities. Prohibits captive insurance companies from joining a FHLB and terminates existing captive members over 5 years. Redefines principal place of business for determining which FHLB insurance companies may join. Requires submission of most recent audited financial statements. Comment Deadline: January 12,

10 Effect of Proposal on FHLB Life Insurance Co. Members Applying a 1% test, from : 10% (13) of FHLB life insurance company members would have failed $921 Mil of advances would have been lost and $18 Bil to $27 Bil of additional borrowing capacity would have been reduced Applying a 2% test, from : 19% (25) of life insurance company members would have failed $7.0 Bil of advances would have been lost and $35 Bil to $52 Bil of additional borrowing capacity would have been reduced Applying a 5% test, from : 47% (61) of life insurance company members would have failed $24.6 Bil of advances would have been lost and $143 Bil to $215 Bil of additional borrowing capacity would have been reduced Source: Company Financial Statements 10

11 Insurance Company Membership in the Federal Home Loan Banks Matt Feldman President & CEO Federal Home Loan Bank of Chicago November 5, Federal Home Loan Bank of Chicago Member owned. Member focused. Presentation Title October 29,