Credit Ratings

Recent Developments

On August 8, 2011, Standard & Poor's Ratings Services (S&P) downgraded the long-term credit rating on the senior unsecured debt issues of the Federal Home Loan Bank System (System) from AAA to AA+ with a negative outlook. S&P has removed this rating from CreditWatch with negative implications, after giving it that designation on Friday, July 15. S&P's action did not affect the short-term A-1+ rating of the System's debt issues.

 

This rating action reflects S&P's downgrade of the long-term sovereign credit rating of the United States of America from AAA to AA+ with a negative outlook. In the application of S&P's Government Related Entities (GRE) criteria, the ratings of the System are constrained by the long-term sovereign rating of the U.S.

 

As previously announced on August 3, 2011, Moody's Investors Service confirmed its Aaa bond rating of the United States government following the raising of the U.S. statutory debt limit on August 2. In conjunction, Moody's also confirmed its long-term Aaa rating on the senior unsecured debt issues of the Federal Home Loan Bank System and other ratings Moody's considers directly linked to the U.S. government. Additionally, Moody's revised its rating outlook to negative for U.S. government debt and all issuers Moody's considers directly-linked to the U.S. government.

 

Obligations of the FHLBanks are not obligations of the United States and are not guaranteed by either the United States or any government agency.


Credit Quality

FHLB debt securities (also known as consolidated obligations or COs) are rated by both Moody's and Standard & Poor's. All long-term debt issued by the FHLBanks is rated Aaa by Moody's and AA+ by Standard and Poor's. All short-term debt is rated P-1 by Moody's and A-1+ by Standard & Poor's. The BIS-risk weighting is 20% in most countries. These outstanding ratings reflect the FHLBank System's financial strength, sound management, low derivatives risk exposure, status as a government-sponsored enterprise (GSE) and other links to the U.S. government.

S&P Credit Analysis as of July 19, 2011  Moody's Credit Analysis as of December 20, 2011

Ratings Rationale

  • The System has a central role in U.S. housing finance and inherent financial strength
  • "Joint and several liability contributes to the [FHLBanks'] overall strength" (Moody's)
  • Loans to members are "overcollateralized" (Standard & Poor's)
  • Secured loans represent 53% of assets at September 30, 2011
  • "Asset quality... has been consistently outstanding, and we expect this to continue" (Moody's)
  • "Excellent asset quality" and "maintain ample liquidity" (Standard & Poor's)
  • "Credit risk performance [of acquired mortgage assets] has been very good..." (Moody's)
  • Regulatory capital-to-assets ratio of 6.93% at September 30, 2011
Strong U.S. Government Support

  • Created by Congress in 1932 to provide stable funding in support of domestic residential housing
  • Recognized for fulfilling its public mission throughout the recent credit crisis
  • Authorized by the Federal Home Loan Bank Act, as amended
  • Regulated by the Federal Housing Finance Agency (FHFA)
  • Interest on FHLB debt securities exempt from state and local income tax
  • Hundreds of millions of dollars in earnings contributed annually towards U.S. affordable housing*
  • Hundreds of millions of dollars paid annually in support of the savings and loan deposit insurance fund*
  • Debt issuance subject to U.S. Treasury approval
  • Fiscal agency agreement with Federal Reserve
  • Eligible for collateral for certain public deposits
  • Eligible for investment by national banks and thrifts
* Legislation defines contributions by the FHLBank System to affordable housing programs and to payment of interest on bonds issued by REFCORP, an entity created in 1989 by the U.S. Congress.

Risk Management

The FHLBanks have never suffered a loan loss on advances. This record is attributed to conservative underwriting standards, strong credit monitoring policies, and the collateralization of all loans (advances) to members. Investments and off-balance sheet credit exposures are managed to conservative credit risk standards.

The existing capital structure has been enhanced with risk-based and leverage capital requirements. Currently, eleven FHLBanks (Atlanta, Boston, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, Seattle and Topeka) have fully converted. The FHLBank of Chicago has not yet implemented a new capital plan. The new capital plans use a risk-based capital component and are similar to those of depository institutions and other housing GSEs.

Federal Housing Finance Agency

Created on July 30, 2008 when H.R. 3221 was signed into law, the Federal Housing Finance Agency (FHFA) regulates the 12 FHLBanks and the Office of Finance. The FHFA is responsible for monitoring the ability of the FHLBank System to sustain its core business within prudent risk limitations, while fulfilling its public policy mission. The FHFA conducts annual on-site examinations of the FHLBanks and the Office of Finance, as well as off-site review of their financial operations.

What The Rating Agencies Say

Moody's released an updated credit analysis of the FHLBank System on December 20, 2011 and S&P released its credit analysis of the FHLBank System on July 19, 2011. The following are some analyses highlights. 

Moody's Investors Service, August 2011
"The FHLBank System's BCA reflects its excellent asset quality and consistent risk-adjusted profitability, as well as the benefits associated with the joint and several liability for the FHLBanks' debt. Asset quality remains a core strength of the FHLBank System (System), having never incurred a credit loss on an advance, which represented over 53.4% of total assets at September 30, 2011. The FHLBank System's profitability reflects the lower risk profile of the System. The System's ROAA has been very stable with a five year standard deviation of 0.08% from year end 2007 through...September 30, 2011, a very low amount. The FHLBanks' standard deviation of ROAA compares with a 0.46% standard deviation of ROAA for all Aa-rated banks. However, the FHLBank System's ROAA of 0.27% for the same period is much lower than the 1.14% ROAA of U.S. Aa-rated banks.

The asset quality of FHLBank advances has been consistently outstanding, and we expect this to  continue. To date, no credit loss has ever been incurred on an advance. The FHLBanks' assets consist primarily of advances, investments and mortgage loans purchased from their members. Advances represented 53.4% of assets at September 30, 2011... The FHLBanks' collateral requirements on advances, and their preferred creditor status, support credit quality in the event a member defaults on its advances. Each FHLBank has individual credit approval power and establishes its own underwriting standards and eligible collateral, within Federal Housing Finance Agency guidelines. Eligible collateral includes current first-lien residential mortgages (overwhelmingly single-family) or securities backed by such mortgages, federal agency securities, FHLBank deposits and other real estate-related assets approved by the relevant FHLBank's board of directors...Memmber/borrowers are also subject to monthly monitoring, and the FHLBanks can request additional collateral.

Standard & Poor's, July 2011

"Standard & Poor's Ratings Services' 'AAA' rating on the Federal Home Loan Banks (FHLB or FHLB System) reflects the system's status as one of three housing GSEs, its important role as a primary liquidity provider to U.S. mortgage and housing-market participants, its diverse global-investor base that enables ample liquidity at low funding costs across maturities, and its excellent aggregate asset quality in its collateralized wholesale lending portfolio...The FHLB System has low funding costs on its debt ("consolidated obligations") because of a joint and several liability on the combined strength of the 12 independent FHLBs and the implicit government support the FHLB System receives as a GSE.

The FHLB System maintains excellent asset quality through its advance-loan portfolio, which comprises 52% of combined assets. Across the FHLB System and throughout its history, no FHLB has taken a single loss related to its advance business. Member institutions must secure all advances, and FHLBs only lend as much as discounted collateral policies would warrant. We believe the FHLBs have been appropriately modifying collateral-management guidelines, which increases haircuts for additional perceived risk in collateral types or troubled originators. Furthermore, troubled originators must deliver their pledged collateral to their respective FHLBs for collateral management and security....we believe the FHLB System continues to be a reliable source of liquidity for all lenders who are members of an FHLB and participate in the U.S. housing market. The System banks have afforded their members a readily available liquidity channel without adding unwarranted credit risk in their lending activities. This support was evident through the financial crisis and the subsequent economic recession, as advances rose to a peak of $1.01 trillion in the third-quarter 2008 before falling gradually...toward precrisis levels.

The FHLBs are owned by their members. Member institutions are primarily commercial banks and savings banks, but have grown to include credit unions, insurance companies, and community-development financial institutions...A member must contribute capital to belong to an FHLB. The member's stock requirement is generally based on its use of FHLB products, subject to a minimum requirement based on the member's mortgage-related assets. In return, the member may borrow on a secured basis at generally attractive rates from its FHLB. In addition to borrowing rights, members may receive dividends on their shares in their FHLB, which helps to lower their all-in funding costs.


We believe the role of the FHLB System to the government is critical and define the strength of the link between it and the U.S. government as integral. It is one of the primary channels the government has established to ensure consistent liquidity to support U.S. housing and community-investment activities. The FHLB System offers a reliable source of liquidity through secured financing and MBS purchases that a private entity could not readily achieve on its own, especially without an active securitization or covered bond market."