Uptick in home loan bank issuance suggests additional supply is coming
The amount banks borrow from the Federal Home Loan Banks ticked higher last week, a harbinger of more demand ahead as a key central bank funding facility expires next month.
FHLB’s total debt outstanding rose last week, with $22 billion of net issuance, according to Citigroup Inc. It’s an indication that demand for short-term loans has started to rise again, although it’s nowhere near the weekly issuance seen during the banking turmoil in March 2023.
The uptick in demand comes as the Federal Reserve’s Bank Term Funding Program — unveiled during last year’s regional banking crisis to ease stress in the financial system — is set to end on March 11. With the loans maturing, banks will look to replace the cash they’re losing. At least so far, the demand appears unconnected to any concern about New York Community Bancorp’s risk for U.S. dollar-denominated funding markets.
“Given the BTFP facility is phasing out in March as scheduled, banks will return to the FHLB in need of liquidity,” Citi strategist Shuo Li wrote in a note to clients on Friday.
The BTFP has allowed banks and credit unions to borrow funds for as long as a year, pledging U.S. Treasurys and agency debt as collateral valued at par. Until last month, the rate for these advances was equal to the one-year overnight index swap rate plus 10 basis points. It’s now in line with the interest on reserve balances rate — currently 5.40%.
For financial institutions, that meant it was cheaper to borrow cash through the newer facility rather than the discount window, which charges 5.5%, or from Federal Home Loan Banks.
Domestic banks lost about $312 billion of deposits in January, according to Federal Reserve data. During that time, bank borrowing picked up, and FHLB demand remained flat, according to Citi.