Federal Home Loan Banks: Primary Mission #Asset #Ratios and Transitioning from #LIBOR.
The Federal Home Loan Bank Act of 1932 (P.L. 72-304; 47 Stat. 128) created the Federal Home Loan Bank (#FHLB) system, which currently consists of 11 regional institutions and the system’s Office of Finance. These entities collectively constitute one government-sponsored enterprise. The FHLBs are federally chartered cooperative financial institutions, meaning that each FHLB is privately owned and capitalized by its members. Four types of financial institutions may become FHLB system members: (1) federally insured depository institutions (i.e., banks and credit unions), (2) insurance companies, (3) community development financial institutions, and (4) non-federally insured credit unions that meet certain statutory criteria. Each FHLB provides advances (cash loans) to member lending institutions in its regional district. Members may obtain FHLB advances if they have the eligible assets that can be used as collateral—typically mortgage and mortgage-related assets that promote homeownership.
The FHLBs are required by statute to administer various programs that foster affordable housing and community development. Each FHLB must set aside 10% of its annual net earnings to support the acquisition, construction, or rehabilitation of affordable rental housing in its district. The FHLBs also provide discounted advances to facilitate affordable housing as well as broader community developments in areas meeting certain eligibility requirements in their districts.
As the FHLBs’ primary regulator, the Federal Housing Finance Agency (#FHFA) requires calculation of each FHLB’s primary asset mission ratio (#PMAR) to monitor the extent to which its activities align with mission goals. The PMAR, sometimes referred to as core mission asset ratio (#CMA), is a ratio of an FHLB’s asset holdings affiliated with its core mission relative to consolidated obligations. FHFA has a regulatory preferred PMAR minimum of 70% based on an average calculated over several review periods. If an FHLB’s PMAR falls below 55% over several consecutive review periods, its board of directors will be required to submit to FHFA an explanation of the shortfall as well as a strategic plan to restore it at or above the 70% preferred level of mission achievement. Table 1 shows the 2019 PMARs for the 11 FHLBs.
