Three ways to put Letters of Credit to work for you
posted on Friday, January 13, 2017 in Letters of Credit
Build your relationships with public unit depositors and support new business opportunities with an FHLB Des Moines Letter of Credit.
Challenge: A member is using a callable security to collateralize a public unit deposit. The member receives notification that the bond is going to be called at the next call date, which is in five days. The member has the option of pledging another security or purchasing a replacement security. The member receives the proceeds from the called security and forgets that a replacement security is needed to fully collateralize the deposit. A security takes at least one day to settle, so this is not an option. It is also too late to pledge another security to cover the deposit.
Solution: Collateralize the deposit until a replacement security is pledged or purchased using a Letter of Credit. The LOC can be for any amount and timeframe that the member selects.
Challenge: A member is experiencing strong loan growth and has been selling securities to fund this growth. The majority of these securities were pledged to the local school district to collateralize their deposits. Therefore, liquidity is at a premium, and the member has no excess to purchase securities.
Solution: Using their increased borrowing capacity, the member can secure a LOC to collateralize these deposits. Additionally, these loans can be pledged as collateral (if eligible) to expand borrowing capacity.
Challenge: A member has an investment portfolio that contains a sizable amount of mortgage-backed and callable securities. Rates have dropped significantly and multiple bonds have been called. The principal pay downs on the member's mortgage-backed securities have accelerated. The member has decided to buy municipal securities instead of Treasury and Agency securities to enhance yield. Unfortunately, most of these securities are not considered eligible collateral (by the public unit) to securitize these deposits.
Solution: The member is able to continue to meet their investment objectives by investing in municipal securities and can call the Money Desk to issue a LOC to collateralize the deposit at a negligible cost.
FHLB Des Moines Letters of Credit
FHLB Des Moines Letters of Credit are AAA-rated and an attractive alternative to pledging securities for public unit deposits. LOCs can be used for public deposits, including state, city or municipal deposits, construction lending or confirming housing related or community development bonds.
LOCs protect public unit depositors by paying, upon demand, if a member defaults under its depository agreements with these depositors. Unlike securities, LOCs are not subject to market value fluctuations or call provisions; therefore, public units only need to monitor the LOCs expiration date. Additionally, LOCs keep securities liquid, reduce the operating expense associated with monitoring deposits and also eliminate the need to match securities and monitor margin calls. Follow these steps to request a Letter of Credit:
- Complete the Letter of Credit application.
- Submit the application to the FHLB Des Moines Money Desk.
- If submitted by 3:00 PM CT, the application will be processed the same day.
- Letters of Credit