FHLB Des Moines Advances: Never Underestimate the Value of Flexibility

posted on Monday, December 21, 2020 in Advances

How many of you have been at a sporting event during a celebratory moment and have noticed the stands shaking as you continue cheering? There is a structural engineering term, “bending moment,” that refers to the bending effect of a structural element when a force is applied. This flexibility of the support structure is imperative in preventing a structural shear, which can lead to catastrophic consequences. The important point to consider here is that if a support structure is too rigid or lacks flexibility this can lead to disastrous outcomes.

Net interest margin (NIM) levels for all financial institutions continue to be stressed as financial institutions continue to grapple with how to reinvest excess liquidity that has been absorbed by the financial services industry. These institutions’ ability to reinvest excess funds at positive spreads has been minimized by a decline in investment yields, a suboptimal credit environment and stagnant loan demand. These forces have created a relative inability to increase asset yields in a significant way to stabilize this NIM compression.

Many financial institutions have instead chosen to concentrate on the liability side of the balance sheet. In particular, they are evaluating their interest-bearing liabilities cost of funds. What many of them are discovering is something that we already knew: there is only one wholesale funding source that provides them with just-in-time flexibility to restructure or prepay prior to maturity (subject to a “make whole” fee) in their wholesale funding portfolio: FHLB Des Moines advances.

Since January 1, 2020, 33 FHLB Des Moines members have restructured over 120 advances approximating $469.2MM. The flexibility of FHLB Des Moines advances afforded these members the ability to restructure existing FHLB Des Moines advances (subject to prescribed accounting rules), which allowed them to lower their borrowing costs and extend liability base duration without diluting their capital base. Unlike any alternative wholesale funding, members have the immediate ability to prepay advances. While repayment activity is not accretive to the Bank’s future earnings projections, this feature is one of the major benefits of using FHLB Des Moines advances as a preferred wholesale funding source and is a key component in the strategic partnership that we have with our members.

Similar to the engineering world, diversification of wholesale funding sources is paramount to constructing a solid liquidity and risk mitigation plan. It is equally important to construct a wholesale funding portfolio that provides flexibility to absorb any amount of balance sheet stress.

FHLB Des Moines advances offer flexibility in terms, structures, prepayment provisions, restructuring, optionality, advance size, “just-in-time” availability and settlement dates. They also offer an unparalleled level of dividend-adjusted pricing and duration certainty. Don’t sacrifice liability base flexibility by keeping your most flexible funding option as “dry powder”. A lack of flexibility in your wholesale funding portfolio and, for that matter, your entire funding mix should never lead to stress fractures or negative tipping points.


Questions? 

If you want to discuss funding options and strategies or hear more about the structural flexibility of FHLB Des Moines advances, please contact your relationship manager or contact the member strategies team.

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