Bank crisis shows signs of easing as FHLB debt issuance shrinks in late March


The Federal Home Loan Bank system issued $37 billion in debt in the last week of March, a sharp drop-off from the $304 billion two weeks earlier, according to a person familiar with the matter. That plunge from an all-time peak earlier in the month is an early sign that the banking crisis has started to subside. 

The FHLBs are a Depression-era backstop created to boost mortgage lending. The system is now known as the “lender of next-to-last resort” — a play on the nickname for the Federal Reserve’s discount window that underscores the FHLBs’ role as a lender that banks use to bolster their balance sheets.

Though FHLB lending is still elevated, the declines in advances and debt issuance signal that member banks’ need for cash is either met or dropping, and that many depositors are no longer pulling their cash from financial institutions. They also support the claim from JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon last week that “we’re getting near the end of this particular crisis.”

Short-term issuance — notes with terms from one day to one year — fell sharply. It reached a peak of $153 billion for the week ended March 17, according to the person, who asked not to be identified discussing data that aren’t public. That issuance fell to $32.2 billion the next week and then declined to $17.6 billion the week ended March 31. 

The role of the FHLBs as a backstop for banks has come into the spotlight after the collapses of Silicon Valley Bank, Signature Bank and Silvergate Capital Corp. All three institutions tapped their local FHLB bank for financing ahead of their demises. 

This has accelerated calls for reform of the FHLB. Loans from these banks have preferential interest rates due to their implied government backing, and their debt is first in line to be paid back in the event of a bankruptcy — even ahead of the Federal Deposit Insurance Corp. Critics say these privileges are undeserved and the system’s lending can subsidize risky behavior by financial institutions. Supporters say the system is a valuable source of liquidity and stability.

A wide-ranging review of the system was already underway at the Federal Housing Finance Agency, the system’s regulator, when the banking crisis started in March. 

The system’s bond issuance — with durations generally over one year — has also tumbled. The system issued $151 billion in bonds the week after Silicon Valley Bank was put into receivership, $40.1 billion the next week and then $19.8 billion the week ended March 31. 

Banks might be more reticent to pursue longer-term loans from the FHLBs if they don’t expect a protracted need for cash, as the loans come with a prepayment penalty if a bank wants to get out.

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