Member Advantage

First Quarter 2018

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José R. González


In the second half of last year, in response to the devastation wrought by hurricanes Harvey, Irma and Maria, our team – at the request of the Board of Directors – developed a strategic framework for our disaster response efforts to ensure that we are best-positioned to work with our members to support relief and recovery efforts in any future disaster. This framework will allow us to more efficiently respond to disaster events in our District, focusing on the most effective forms of assistance and resources that we are able to provide.

And while the tools at our disposal include our Disaster Relief Loan Program – $1 billion of which we made available following these hurricanes, and which has provided support following past disasters, including Superstorm Sandy – our Community Lending Programs and even our Affordable Housing Program for more long-term recovery, we also created a pair of grant programs to respond to the specific needs in Puerto Rico and the U.S. Virgin Islands.

On March 19, we unveiled our Homeowner Recovery Grant and Small Business Recovery Grant programs. These programs, funded with $5 million approved by our Board, are administered by our Caribbean member institutions – the local lenders who know the needs of the communities as they continue to recover from last year’s storms.



José R. González
President and Chief Executive Officer




Historical US Treasury yield curve

Now that six post-crisis rate hikes are behind us, the Fed continues to move forward with a tightening economic stance with the anticipation of more short-term rate hikes to follow. Although the overnight Fed Funds rate has increased by 150 bps, the long end of the yield curve has largely been range-bound. Since year-end 2015, the Fed Funds rate has climbed by 125 bps, while the 10-year Treasury has averaged 2.14%, and is currently only at 2.85%. Looking at the chart above, the current yield curve has experienced an upward shift since year-end 2017; however, it is still very flat, causing significant headwinds to our members’ net interest margins this year, absent a significant steepening.

Additional economic challenges include softer mortgage origination volumes resulting from rising rates and intense competition for retail funding. Welcome tax reform changes are adding to members’ bottom line earnings and capital, which leads to heightened appetites for funding to leverage that capital accompanied by a more aggressive posture when seeking loan growth. The rising rate environment is putting added pressure on deposits because there is a stronger risk of money outflowing as consumers seek higher returns. Adding to our dynamic banking environment is the potential for regulators to lift the total asset threshold defining Systemically Important Financial Institutions (SIFI) to $250 billion. Should the threshold be increased, the doors could be opened for heightened M&A as larger acquirers will no longer be dissuaded from executing smaller deals due to their diminished desire and need to obtain significant scale when seeking merger partners.


As mentioned in previous editions of the Member Advantage, competition for deposits has significantly intensified due to BASEL III’s post-crisis liquidity measures, and deposits are flowing in greater proportions to the largest of institutions who benefit most from having retail deposits as opposed to other funding sources. The rate of deposit growth amongst the largest of institutions has greatly surpassed the rest of the industry over the course of time, as illustrated in the following charts. The percentage of total deposits amongst the top 25 banks has approached 65%, up from the 25% range 25 years ago — an enormous transformation, which if sustained, may lead to more and more banking organizations to seek merger partners due to liquidity constraints.

US Bank Deposits
Data source:





In today’s operating environment, community banking organizations are feeling the squeeze on liquidity as they seek to achieve balance sheet growth. Rising rates are putting deposits at risk of flight, rate competition is intensifying, and larger firms are investing heavily in technology to try to attract and retain retail deposits. Consider the following strategies to assist with overcoming the significant “headwinds” of the current operating environment.


Consumer indifference to deposit rates appears to have changed, and we are hearing that depositors have started to move their money as they are requiring be er returns. Heavy outflow of core deposits, which are long-term in nature, could materially alter your interest rate risk profile and make you susceptible to declining earnings and regulatory risk. We realize that the need to raise rates varies greatly based on region, and that is reflected among our membership. However, failing to act could limit balance sheet growth opportunities.


Although NIM pressure has persisted post-financial crisis, the current operating environment is seemingly very different from the past nine years, with an extremely flat yield curve posing the potential risk of an inversion if the long-end of the yield curve does not steepen. Absent of a steepening yield curve, you may be able to stabilize Net Interest Income (NII) through additional asset growth, as many members have done post-crisis. As mentioned previously, this year’s tax reform will likely positively impact most members’ capital – so consider getting ahead of that capital increase by adding additional leverage now by either retaining mortgage production or by adding securities. Some members are adding securities now and structuring their cash flows to coincide with new loan growth.

If you believe your balance sheet interest rate position could withstand longer-term assets, going further out on the curve to gain additional yield could be a prudent strategy. Important to consider is the ability to pledge these assets as collateral to the FHLBNY, so your liquidity position is not materially altered. Hedging long-term assets by layering in longer-term FHLBNY funding structures may also present a solution. The following FHLBNY advance products may assist with achieving your asset growth goals.

Regular Term "Bullet" Advances

The FHLBNY is pleased to assist its members with arriving at a funding structure that helps maximize NII while mitigating interest-rate risk. A "laddering" approach to funding term assets uses a mix of short-term and long-term regular advances. Depending on your ALM position, there may be periods of interest rate risk exposure on the horizon where long-term liabilities will be necessary to stay within your risk tolerance limits. Regular advances are straightforward and easy to model – their simplicity makes them the most popular advance category among our cooperative.

Consider adding symmetry to your regular advance for an additional two bps by requesting the Symmetrical Prepayment Advance (SPA) Feature. The SPA feature allows an advance to incur a gain which could be realized if the mark-to-market valuation becomes "in the money" during the life of the advance. Advances with the SPA feature added could also potentially assist members who are looking for merger partners. Upon a merger we often see members conduct balance sheet restructurings that may include advance pay-offs. When considering a merger, whether you are an acquirer or are being acquired, there is an advantage of having gains in your liabilities that can be monetized, because there is a high potential these advances will be paid off upon commencement of the deal.


Collateral infographic

We believe that the operating and interest rate environment in 2018 will be very dynamic with both headwinds and tailwinds on many fronts. If members are not on a growth trajectory, NIMs and capital positions could deteriorate. Staying relevant, growing earnings, and investing in people and technological infrastructure will be key to sustaining your organization for the long-term. The FHLBNY stands ready to assist you with your liquidity needs through a variety of funding structures.

If you have any questions about our advances and credit products, or the strategies mentioned, contact your Relationship Manager at (212) 441-6700 or our Member Services Desk at (212) 441-6600. We welcome the opportunity to present to your Board, management, and/or ALCO teams regarding these strategies or other topics of your choosing as you navigate through 2018.




Since our last edition, four members joined the FHLBNY cooperative:
  • Guardian Life Insurance Company of America
  • Nova UA Federal Credit Union
  • Ticonderoga Insurance Company
  • Western Division Federal Credit Union


The FHLBNY looks forward to connecting with our members and business associates in person at the following upcoming events. Please visit the Upcoming Events section on our website.



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