FHLB/TAF borrowings(icm63)

icm63 iTulip Select Premium Member

Join Date: Dec 2007 Posts: 24 Credits: 1,629

Re: EJ, have you seen this?

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I have found the final world the matter..its a red herring..

http://piggington.com/bank_reserve_r...ts_and_the_taf

There's a post, apparently from someone over at Calculated Risk, that'sposted in the middle of the thread that's approximately correct. (Mostimportantly, the poster correctly points out the difference between"liquidity reserves" and "capital," two very different things.)
I'm not going to go through all of the balance sheet math here becauseit would take too long and wouldn't accomplish very much. Suffice it tosay that banks have five major sources of funding for loans: (1) CommonEquity, (2) Trust Preferred and Sub Debt, (3) FHLB Borrowings, (4)Other "Fed-related" borrowings (such as the TAF, currently), and (5)Deposits. If the rates offered through the FHLB system or the TAF areas good or better than the terms that would have to be offered todepositors, then many banks will go with the past of least resistance -FHLB borrowings or the TAF. Remember, deposits not only cost money fromthe rate side of things but you also have to pay employees, etc. toprocess them; that is, deposits are "operationally expensive."Sometimes it's just cheaper and easier to use the "government's money"(for lack of a better term), especially when Fed is practicallythrowing the money at them.
Merely the fact that the banks are availing themselves of theopportunity to use these funds doesn't mean a whole lot. Nor is itreally meaningful to look at liquidity reserves in relation to thesefunds. If the government gives warning that these funds will no longerbe available as of "x" date, the banks will just raise deposit rates,take in sufficient deposits and repay the borrowed funds. Yeah, they'llsee a margin squeeze, but it's not the end of the world.
Look, the regulators understand liquidity really well. This is anon-issue in the aggregate. The REAL issue is with capital andsolvency. And regulators aren't particularly good at that because it'shard to analyze a loan portfolio that you didn't underwrite yourself ora complex MBS portfolio that you didn't purchase yourself. Liquiditywill only become an issue AFTER more capital/solvency issues crop up,as in the recent case of Countrywide.
People should keep their eyes on the losses in the loan and securities'portfolios. These FHLB/TAF borrowings, while not entirely unimportant,are a red herring.