FHLBInsider

By Jeff Sanders, senior credit and industry analyst

The FHLBI recently began sending a Credit Availability Report (CAR) to its members. The report is intended to assist members in their cash management efforts by summarizing available borrowing capacity. A variety of questions have been raised by members since the first mailing. The following answers to some of the more common questions should make the CAR more useful for all members.

Q: What do the numbers in the CAR mean, particularly the capacity limitations?

A: The CAR provides a concise summary of a member’s current access to FHLBI advances, subject to normal underwriting, documentation, and approval procedures. The member’s current capacity is expressed in the excess borrowing capacity section which reflects the difference between each of four total capacities and the amount of credit products outstanding. Use of the CAR requires an understanding of how the limits are calculated and whether they may be increased. Following is a brief description of each capacity.

• Based on resolution amount - Each member’s board must adopt a resolution setting a limit on total FHLBI advances. The sample report below indicates the member has a board resolution limit of $10,000 ($4,000 in outstanding advances plus remaining capacity of $6,000).
• Based on FHLBI stock - A member's borrowing capacity depends on the amount of FHLBI stock owned. The multiple (discussed below) is based on the member's mortgage-related asset balance, expressed as the qualified assets ratio (QAR).
• Based on collateral - The member's collateral status - blanket, specific identification, or physical possession - affects the borrowing capacity. The stronger the FHLBI's claim on collateral, the larger the percentage of collateral value that can be borrowed.
• Based on mortgage-related assets - By statute, non-thrift members may not have advances in excess of their mortgage-related assets.

Note: The FHLBI’s willingness to lend up to the above levels will be contingent upon, but not limited to, the acceptability of the institution’s financial condition at the time of each credit request, as well as its compliance with all applicable collateral requirements, regulations, laws, and FHLBI policies.

Q: Are all the limits stated in the excess capacity section absolute?

A: The mortgage-related assets limit (4) may not be exceeded by non-thrift members. Members may increase capacity by amending the board resolution (1) or by purchasing additional stock (2), if necessary. A member seeking to increase the collateral-based limit (3) must either increase the amount of collateral pledged or agree to a collateral status which reduces the coverage requirement. Changing the collateral status may be time-consuming, but the capacity increases proportionally with collateral growth. Using advances to fund additional assets qualifying as collateral may generate a much higher level of additional borrowings than suggested by the existing collateral limit.

Q: How much stock must be purchased to exceed the stated FHLBI stock (2) limit?

A: If the QAR is 65% or higher (or if the institution has retained Qualified Thrift Lender status), every dollar of stock adds $20 of borrowing capacity. Otherwise, every dollar of stock increases the borrowing capacity by the QAR times $20. The sample institution’s total borrowing capacity of $5,400 equals $450 X 60% X $20. Once the existing capacity is depleted, the formula must be reversed to calculate the stock purchase necessary to support additional borrowings. If the QAR is 65% or higher, the required stock purchase equals the desired borrowing divided by 20. Otherwise, the additional purchase equals the desired borrowing divided by 20 divided by the QAR. If the sample institution was seeking to borrow $1,000, but had depleted its capacity based on stock, the additional stock to be purchased would be calculated as ($1,000/20)/60%. This equals a purchase of $83.33 of additional stock. (Note: Stock purchases are rounded up to the next $100, and are charged when the advance is disbursed.)

Q: How are members using this report?

A: The CAR is commonly used to evaluate liquidity risk since FHLBI borrowing capacity offers many members a high level of secondary liquidity. Knowledge of borrowing capacity provides flexibility in determining the most profitable strategy to maintain sufficient liquidity during periods of uneven cash flows. Further, it may be used in the strategic planning process as the funding sources for growth are evaluated.

Q: Are members permitted to provide this report to regulators?

A: We recommend providing the CAR to examiners as part of the documentation of liquidity risk measurement. Assessment of alternative funding sources is likely to gain additional attention in the liquidity evaluation due to the recent separation of market risk from the liquidity section. Be sure the examiners are aware of the limitations of the report and are familiar with the opportunities to alter the level of available credit.

If you have not actually gone through the borrowing procedure, we recommend that you test the advance window by taking down a small, short-term loan. This will insure that everything is in place for immediate access to liquidity advances. The test should be included in your documentation of liquidity management for examiners.

Q: When do the limitations change?

A: Availability changes daily as advances are drawn or repaid. The total limits change as information used for the calculation of each limitation becomes available. The QAR is only calculated annually.

Q: Are members guaranteed to receive advances up to our limits stated on the CAR?

A: Each advance request is still independently reviewed. However, it would be extremely unusual for the Bank to deny requests for liquidity purposes within the limits.

Q: How often is the CAR sent?

A: We are planning quarterly mailings, and hope to have it available via the Internet in the near future. If you need a report between quarterly cycles, please call the credit department at (800) 442-2568 and an updated report will be provided.

This article has been presented for educational purposes only.  The FHLBI is not a financial or investment advisor.   It is solely the reader's responsibility to evaluate the risk and merits of any funding strategy or business proposal.

Copyright 1997, Federal Home Loan Bank of Indianapolis