22 Nov, 2021

FHLBs' balance sheet may soon depend more on insurers than commercial banks

Despite a small sequential decline in aggregate borrowings during the third quarter, U.S. insurance companies may be poised to become the largest category of borrowers from the Federal Home Loan Bank, or FHLB, system as soon as the end of 2021.

The Take

Commercial banks accounted for more than 60% of total FHLB advances at aggregate year-end par value through much of the 2010s, and their share stood at 62.5% as recently as March 31, 2020. Circumstances have changed dramatically since then, however.

Of the $350.04 billion of systemwide advances as of Sept. 30, commercial banks accounted for 35.0% and insurance companies were responsible for 32.7%. The latter figure increases to 35.8% upon the hypothetical inclusion in the insurance company numerator of borrowings by a JPMorgan Chase & Co. Vermont captive that has been classified as a non-member borrower in conjunction with federal rulemaking.

Elevated deposits at commercial banks have materially reduced the need for the liquidity provided by FHLBs during the past six quarters, in turn pressuring aggregate advances across the system.

FHLB funding agreements, which life insurers may utilize as part of spread investing strategies, constitute the largest portion of overall insurance industry borrowings. This has translated into greater stability in outstanding borrowings within that category of member.

Neither factor seems bound to change materially in the near term. S&P Global Market Intelligence put the banking industry's excess liquidity at an estimated $3.72 trillion of as June 30. Insurers, meanwhile, continue to search for incremental yield in a low-interest-rate environment.

Were advances to insurance company members to decline at the same 1.9% rate between Sept. 30 and Dec. 31 that they did over the course of the third quarter, they would hypothetically exceed commercial bank advances should the latter decline at a rate of 8.4% or more. Commercial bank advances have declined at double-digit rates on a sequential basis for six consecutive reporting periods, including by 10.9% in the third quarter.

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Savings institutions and credit unions constitute distinct borrower categories. Their respective shares of total system advances have increased in recent quarters due to slower rates of decline than commercial banks have shown.

A drop in FHLB borrowings at Citigroup Inc. helped fuel the latest retreat as they plunged to $5.8 billion as of Sept. 30 from $9.5 billion as of June 30 and $14.7 billion on the same date in 2020.

Among the largest insurance company borrowers, trends were mixed.

MetLife Inc., primarily through Metropolitan Life Insurance Co., remained the largest FHLB advance-holding borrower among all categories of financial institutions. Its $16.25 billion in aggregate advances was down only slightly from $16.30 billion three months earlier, and it remained well above second-place New York Community Bancorp Inc.

Equitable Holdings Inc., which ranked No. 6 among all borrowers and No. 2 among insurers as of June 30, slipped in both respects as its aggregate advances as of Sept. 30 of $6.80 billion were down from $8.21 billion. TIAA ranked No. 7, overall, and No. 2 among insurers as of Sept. 30, one spot ahead of Equitable in both instances. Its $7.52 billion tally as reported by the FHLB system would appear to include $1.12 billion attributable to Teachers Insurance & Annuity Association of America, with the majority attributable to savings bank affiliate TIAA FSB. The insurance company's advances more than doubled during the third quarter, though they remained below their year-end 2020 level.

Allianz Life Insurance Co. of North America's aggregate borrowings fell by $1.20 billion between June 30 and Sept. 30, though at $2.40 billion, they were still up $900 million from year-end 2020. New York Life Insurance Co. showed an inverse trend as its Sept. 30 borrowings of $2.73 billion were up from $2.33 billion as of June 30 but down from $3.26 billion as of Dec. 31, 2020.

Borrowings at EquiTrust Life Insurance Co. Inc. and Symetra Life Insurance Co. increased relative to the prior year and quarter ends to $3.63 billion and $2.32 billion, respectively. While Athene Annuity & Life Co.'s quarter-end borrowings held firm with the prior year-end at just over $2 billion as of Sept. 30, the company noted in its quarterly statement that it took out a one-month-term borrowing of $145 million in October.

In the property and casualty sector, which accounted for less than 9.8% of the insurance industry's aggregate advances at year-end 2020, State Farm Mutual Automobile Insurance Co. showed a $748.2 million decline in borrowings between June 30 and Sept. 30. The insurer became a member of the Federal Home Loan Bank of Chicago in June 2020 in connection with various internal asset purchases from the now-dissolved State Farm Bank FSB. It continued to lead the sector with aggregate borrowings of $3.26 billion as of Sept. 30.

The FHLBs said in their combined financial statement, which was released Nov. 16, that they generally expect that advances "may remain at reduced levels or decline further if the level of liquidity in the financial markets and deposit levels at members remain elevated." Only 47.1% of active FHLB members had outstanding advances as of Sept. 30, down from 51.8% as of Dec. 31, 2020.

Among the 11 individual FHLBs, only the Federal Home Loan Bank of Topeka showed an increase in aggregate advances on a sequential basis. Declines at the other 10 institutions ranged from 0.5% at the Chicago FHLB to 13.2% at the Federal Home Loan Bank of Pittsburgh, reflecting declines in advances by JPMorgan Chase and Ally Financial Inc.'s Ally Bank.