The Federal Housing Finance Agency has proposed relaxing limits to capital rules on interest-bearing deposit accounts that would give the Federal Home Loan Banks more flexibility to manage liquidity during times of stress.
The FHFA on Monday proposed a rule that would exclude interest-bearing deposit accounts and other investments from certain capital requirements. The proposal would give interest-bearing deposits the same capital treatment as overnight federal funds, potentially making it easier and less costly for the 11 regional Home Loan Banks to manage their own liquidity.
The proposal is largely a technical tweak that the Home Loan Banks have asked for because interest-bearing deposits have become a preferred money market instrument, particularly during periods of higher interest rates.
"These modernizations will create more flexibility for the FHLBanks in their liquidity management, which will allow them to better serve their members, particularly during periods of market stress," FHFA Director Sandra Thompson said in a press release.
Thompson said the proposal follows on the release of a report last year,
Currently, overnight federal funds are excluded from the more restrictive "general limit" on capital requirements for unsecured credit to a single counterparty. Under the proposed rule, interest-bearing deposit accounts would be excluded from the "general limit" and would instead join overnight federal funds in the "overall limit" as a special category of unsecured extensions of credit subject to a substantially higher limit.
"FHFA expects that expanding the Banks' ability to use IBDA deposits for liquidity management would further benefit the Banks by reducing the overall cost of holding liquidity assets due to higher yields available through [interest bearing deposit accounts]," the FHFA said in
Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, said the system supports enhancements that provide more liquidity to its members.
"As FHFA notes, the changes in this proposed rule are in furtherance of the agency's effort to modernize the FHLBanks' ability to meet the liquidity needs of members," Donovan said.
The FHFA, the system's regulator, said the financial products the banks invest in "have evolved considerably" since 2011, when general and overall capital limits were created by a predecessor agency. Money market instruments — including overnight Fed Funds, reverse repurchase agreements and interest-bearing deposits — make up the biggest segment of bank liquidity holdings.
The Home Loan Banks issue debt that comes with an implied government guarantee, providing ready access to low-cost funding even during periods of financial market dislocation. Besides issuing debt, the FHLBanks can meet members' short-term liquidity needs using funds held in their deposit accounts at the Federal Reserve or in interest-bearing deposit accounts at large domestic banks.
On Friday, the FHFA followed up on the 100-year review with
The FHFA is accepting public comment on the proposed rule for 60 days following publication in the Federal Register.
