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18 December 2023
Beware the Banking Hindenburgs
Imagine being asked to financially back the Hindenburg

Imagine being asked to financially back the Hindenburg, and you decide it’s a good idea because, well, even though it’s kept afloat by highly-explosive hydrogen, it has decent assets. After all, there’s plenty of metal in that thing, and that’s got to be worth something, right? Besides, as part of the deal, you establish that you have a super-lien. If anything happens, the insurance is going to have to pay you first.

What could go wrong? In fact, why not hand out money to every airship packed full of flammable gas that happens to float by?

In the November issue of The Bank Treasury Newsletter, editor-in-chief Ethan Heisler describes the FHFA’s thinking in the aftermath of the crashing and burning of Silvergate, SVB, SBNY, and FRC to the tune of $74 billion. As you may recall, when these banks had their financial equivalents of the Hindenburg, the FHLBs super-lien meant that the FDIC Deposit Insurance Fund took a major hit as it had to make the FHLBs whole.

The FHFA is not happy that the FDIC had to clean up after these Hindenburgs, The FHFA has declared that FHLBs are not where banks should be running to when they are going under and need cash in the middle of the night.

Furthermore, the FHFA does not want lending to be based strictly and exclusively on a bank’s collateral and its meeting a positive TCE ratio. After all, just because an airship is built with some nice, tangible aluminum-copper alloy doesn’t mean it’s not going to blow up. No, the FHFA wants FHLBs to – believe it or not – actually assess a bank’s creditworthiness and not just rely on collateral.

Additionally, the FHFA wants to nail down the requirement that member banks have at least 10% of their assets be concentrated in residential mortgage assets if they want to be considered for FHLB financing. And there’s still more. The FHFA has also declared that there should be more Community Development Financial Institutions among FHLB members, and that it is thinking about consolidating the FHLBs if it would improve the system’s efficiency.

Needless to say, the FHLBs do not like that, and would prefer that their views on how to operate prevail.

But, while the FHFA and the FHLB may each want different things, what’s clear is that no one wants any more banks pulling a Hindenburg, and bank treasurers everywhere are continuing to try to keep their institutions flying right.

ORSNN Digital Secondary Market Infrastructure is here to help those bank treasurers keep their liquidity aloft. ORSNN provides a seamless, double-sided marketplace where Wall Street dealers, banks, and credit unions can come together. The platform offers cutting-edge workflow management tools and analytics, as well as unrivaled transactional efficiency and liquidity options. We’ve removed the information asymmetry of traditional whole loan trading, transforming the industry landscape.

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