July 30, 2018
Looking Back While Moving Forward
In June, the Federal Home Loan Bank of New York issued Strength in Our Cooperative, our 2017 Annual Report to members. The report captures numerous achievements the FHLBNY delivered in 2017, not only for our members, but also for the communities we serve. There truly is strength in our cooperative. We saw this strength in 2017, in which we posted record and near-record results across the board. We see it today, as the FHLBNY continues to perform at high levels. And we expect to see it going forward, as we further strengthen our partnerships with our members and support their ability to meet the needs of their communities.
Advantages of FHLBNY Membership
Our strong cooperative and membership presently operate in an equally strong economy. We are currently in a historically lengthy economic expansion, marked by full employment, lower taxes, increasing deregulation and a more normalized rate environment. Our members are positioned to thrive in this environment, experiencing strong demand for loans and other financial services. But, as we move forward, we must remain aware of factors that have the potential to challenge this momentum. This is especially evident in factors that can impact your liquidity position, such as outflow of core deposits.
Traditionally, member assets have grown at a faster pace than both deposits and capital, with wholesale borrowings serving to fill in the funding gap. Following the financial crisis, there was a significant flow of deposits into depository institutions, creating an abundance of liquidity; however, as the economy has strengthened, this liquidity has been largely deployed. And with the largest banking institutions in need of deposits to meet BASEL III requirements, there is increased liquidity pressure on smaller institutions. In addition to this, heightened loan demand – driven by accelerated consumer spending, low unemployment and corporations’ expanded capital investments – and resulting asset growth can put further pressure on liquidity in an environment in which retail deposit funding is challenged.
The recent regulatory reform that will increase the Systemically Important Financial Institutions (SIFI) asset threshold to $250 billion – reducing the number of institutions subject to enhanced supervision and regulation – will likely increase competition for liquidity. For example, as institutions that are currently straddling the former $50 billion threshold may look to pursue aggressive organic balance sheet growth. Additionally, this increased threshold could spur M&A activity, driven by institutions that want to obtain scale but had previously been concerned with the regulatory burden of becoming a SIFI.
When all of these factors are combined with a rising rate environment, which could result in a substantial outflow of deposits as consumers seek higher yield elsewhere, creating both liquidity and interest rate risk challenges for community banks, it is clear that, despite the many opportunities our current operating environment provides, there remain challenges on the road ahead.
Our team at the FHLBNY is constantly monitoring the environment to ensure that we are positioned to help our members recognize and plan for these challenges as they appear. And our role as a funding partner to our members becomes even more vital in an environment in which liquidity is harder to secure. We take great pride in helping our members address challenges through the advantage of membership in the FHLBNY, and the access to our liquidity, products and programs that it provides.
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Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This report may contain forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are based upon our current expectations and speak only as of the date hereof. These statements may use forward-looking terms, such as “projected,” “expects,” “may,” or their negatives or other variations of these terms. The Bank cautions that, by their nature, forward-looking statements involve risk or uncertainty and that actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, regulatory and accounting rule adjustments or requirements, changes in interest rates, changes in projected business volumes, changes in prepayment speeds on mortgage assets, the cost of our funding, changes in our membership profile, the withdrawal of one or more large members, competitive pressures, shifts in demand for our products, and general economic conditions. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
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