On 30 September, the Federal Housing Finance Agency (FHFA) announced its intention to raise counterparty exposure limits on the deposit accounts of Federal Home Loan Banks[1] (FHLB) to the same level as those limits set for their federal funds loans[2], an approach already discussed in its December 2023 report[3]. This harmonisation could lead FHLBs to favour deposits with banks, as these are better remunerated. Supply on the federal funds market, on which FHLBs occupy a prominent position as lenders, would be reduced, driving up the effective rate of federal funds.
Increase in FHLB deposits ahead of two episodes of pressure
On the plus side, this could help big American banks to meet their specific liquidity requirements[4]. The speed with which FHLB deposits were built up in 2018, then in 2022, and the remuneration offered as a counterparty (which exceeded that of bank reserves with the Federal Reserve), suggest in fact, that they are improving the intraday and daily liquidity positions of big banks. Their increase in December 2018 and 2022, on the eve of two episodes of extreme liquidity pressure (September 2019 and March 2023), although different, further suggests that they constitute relevant leading indicators, which would, in a timely way, complement the list of those indicators already monitored by the Federal Reserve.
