October 31, 2017 / 8:31 PM / a year ago

U.S. banks borrowing from U.S. mortgage agency jumps: report

NEW YORK (Reuters) - Large U.S. banks more than doubled their borrowing from the Federal Home Loan Bank System in the past decade in the aftermath of stricter regulations to avert a global credit crisis, a report from the Office of Financial Research released on Tuesday showed.

The FHLB System, which are made up of 11 regional FHLB banks, funds the mortgage market by making loans called advances to its members that include banks, credit unions and insurers.

At the end of June, its advances totaled $706 billion or 65 percent of its assets.

U.S. banks with more than $250 billion in assets accounted for about 30 percent of FHLB advances in June, up from 14 percent from a decade ago.

Three of the five biggest U.S. bank holding companies, JPMorgan Chase & Co. (JPM.N), Wells Fargo & Co. (WFC.N) and Citigroup (C.N), represented roughly 24 percent of the total par value of FHLB advances outstanding at mid-2017.

JPMorgan had $68 billion advances or 10 percent of total advances; Wells Fargo $63 billion or 9 percent and Citigroup $36 billion or 5 percent, the report showed.

“Over the past few years, JPMorgan, Wells Fargo, and Citigroup have increased their aggregate FHLBank funding. The

funding comes from multiple FHLBanks because the three have subsidiaries that are members of multiple FHLBanks,” wrote Kenechukwu Anadu, a financial markets specialist at the Boston Federal Reserve and Viktoria Baklanova, senior financial analyst at the Office of Financial Research.

Under current liquidity coverage ratio requirements, FHLB advances receive easier regulatory treatment than those in private markets, stoking demand from banks for them, they said.

Anadu and Banklanova’s report centered on their findings on FHLB’s role in the U.S. money market due to tighter bank regulations and money market fund reform in response to the 2007-2009 financial crisis.

The implementation of money market reform had boosted FHLB’s issuance of short-term debt to fund its advances, which tend to have longer maturities.

“This funding model could be vulnerable to ‘runs’ and impact financial markets and financial institutions in ways that are difficult to predict,” Anadu and Baklanova wrote.

At this time, a funding run on FHLB is low, they said.

The Federal Housing Finance Agency, which regulates FHLB together with Fannie Mae and Freddie Mac, is taking steps to reduce the FHLB’s reliance on short-term funding, they noted.

Reporting by Richard Leong; Editing by Andrew Hay

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