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Benefits of Membership in the Federal Home Loan Bank System

We often read articles that are interesting, but have little practical application related to the problems our clients face. This article however, has both.

For insurance companies that are experiencing cash flow issues, the following article may provide valuable assistance. As explained below, membership in the Federal Home Loan Bank (FHLB) can provide a company with a ready source of cash to deal with short term as well as long term liquidity problems. We found this article beneficial because it elaborates on how the FHLB can help insurance companies with their cash flow needs, as well as provides information on other FHLB services.

Peter J Bulandr
Vice President, Insurance Sector—Federal Home Loan Bank of Chicago

What’s one of the best-kept secrets in the insurance industry? It could be the Federal Home Loan Bank System. Joining one of the 12 Federal Home Loan Banks across the country can help an insurance company:

• Lower its cost of funds;
• Manage interest-rate and other risks; and
• Manage its overall asset/liability mix.

Congress created the Federal Home Loan Bank System in 1932 to promote housing finance. Today, this system provides billions of dollars of ready, reliable liquidity to more than 8,000 member financial institutions across the country, including banks, thrifts, credit unions—and more than 200 regulated insurance companies. As of September 30, 2009, aggregate borrowings by the Federal Home Loan Banks’ insurance company members were approaching $50 billion.

Each of the 12 Federal Home Loan Banks is cooperatively owned by its members and governed by separate presidents and boards of directors. An eligible, regulated insurance company can become a member of the Home Loan Bank that serves the state where it is chartered by satisfying certain membership requirements and purchasing capital stock, which is valued at $100 par value and not traded. The Federal Home Loan Banks are regulated by the Federal Housing Finance Agency and, through the Office of Finance, they fund loans (called “advances”) to members by selling consolidated obligations in the capital markets.

Reliable Source of Funding

Reliable liquidity is the key benefit of membership in a Home Loan Bank. The Home Loan Banks have served their members for more than 75 years during both steady and unpredictable economic times. In fact, during the 2008-2009 credit crunch, the Federal Home Loan Banks were able to meet their members’ liquidity needs with $400 billion of funding.

Federal Home Loan Bank of Chicago

The Federal Home Loan Bank of Chicago (FHLBC) serves approximately 800 financial institution members that are chartered in the Seventh Federal Home Loan Bank District of Illinois and Wisconsin, including a number of prominent regulated insurance companies domiciled in Illinois and Wisconsin.

The FHLBC provides funding to insurance company members through advances that are collateralized by securities. Members may elect to maintain arrangements of pledged collateral to maximize flexibility. Once these arrangements are in place, funding is just a phone call away and typically can be available on the same day. Members use advances in a variety of ways, including:

• Managing unexpected cash-flow dislocations and catastrophic liquidity events;
• Funding operational needs, securities purchases, and special events without liquidating earning assets (for example, acquisitions and new operating facilities);
• Increasing earnings through more aggressive liquidity management;
• Supporting fixed-rate assets or annuity products; and
• Match-funding assets with regular principal and interest payments.

In addition, standby letters of credit allow members to leverage the credit rating of the FHLBC.

Advances are offered with fixed- or floating-rate options with a variety of maturities, ranging from one day to 10 years. In addition, structures with embedded options or amortization schedules are available. Rates are posted daily on the FHLBC’s website, www.fhlbc.com

To learn more about the overall Federal Home Loan Bank System, visit www.fhlbanks.com and www.fhlb-of.com. For questions about the Federal Home Loan Bank of Chicago, please contact Peter Bulandr at pbulandr@fhlbc.com or 312-565-5328.
 

 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.