The Value of Reliability | By José R. González
Franchise value is a topic on which institutions of all shapes and sizes, and across all industries, are focused. But franchise value has its own meaning for the Federal Home Loan Bank of New York (FHLBNY), with our cooperative structure and a stock that does not trade publicly nor change in price.
Our value cannot be measured in a stock price or an earnings report; rather, as Federal Housing Finance Agency Director Mel Watt put it recently, “the concept of franchise value for an FHLBank relates to delivering the benefits of system membership to its members.” At the FHLBNY, we deliver the benefits of our cooperative to our members every day throughout all operating environments. And last month, we made changes to our capital plan that will enhance the value of membership.
The FHLBNY is continually looking to determine how best to distribute value to members of our cooperative. A recent initiative led by our Strategic Planning Team studied every aspect of Home Loan Bank membership in order to determine the best way to increase our ability to serve our members.
All members of the FHLBNY, regardless of their borrowing activity with us, are required to purchase membership stock, which has a par value of $100 and does not fluctuate with market conditions. Each year, we calculate each member’s membership stock purchase requirement, which had been set at the greater of $1,000 or 20 basis points of members’ mortgage-related assets using year-end financial statements. In June, our board approved management’s recommendation to lower our membership stock purchase requirement by 25 percent, reducing the requirement to 15 basis points of members’ mortgage-related assets, from the prior requirement of 20 basis points.
For our members, this change in the capital plan – which became effective Aug. 1 – means more capital on hand to meet the needs of their customers, as well as to provide a cushion for ever-increasing regulatory and compliance costs. And based on our current projections, we expect that this reduction in capital stock purchase requirements should enable us to pay a higher dividend in future quarters, which means members will receive a greater return on their investment. This will be particularly significant for borrowing members, as we pay a single dividend rate that is applied to the combination of membership capital stock and activity-based capital stock on a daily average basis for the quarter.
The 25 percent reduction in the membership stock purchase requirement is a simple and immediate way to add value to membership in the Home Loan Bank, and is part of our ongoing focus on providing value to all of our members.
Of course, our true franchise value is measured by our reliability. This reliability was proven during the financial crisis, when the FHLBNY was a critical, and often times only, source of liquidity for our membership, with advances peaking at $105 billion on Oct. 31, 2008.
Today, in a relatively calmer environment, we remain a trusted partner for our members. Last month we announced our operating highlights for the second quarter of 2014. These results included $96.8 billion in advances to members, an increase of $9.1 billion from the first quarter of the year, and our highest level of advances in five years. As the economy continues to recover, the FHLBNY and our members are putting nearly $100 billion to work in communities across New York, New Jersey, Puerto Rico and the U.S. Virgin Islands to drive growth at the local level.
Our continued performance and strong balance sheet keep us well-positioned in the actual environment, but our cooperative is well-positioned for potential adverse environments, as well. As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the FHLBNY conducted a “stress test” using regulator-specified scenarios and assumptions to determine whether we have the capital necessary to absorb losses as a result of adverse economic conditions. Last month, we posted the results of the Dodd-Frank Act Stress Test to our website (www.fhlbny.com) and, as these results show, the FHLBNY remains adequately capitalized under both the adverse and severely adverse scenarios proposed by the test. The FHLBNY also remains above regulatory capital requirements over the nine-quarter stress test planning horizon. The results of this test should bring comfort to our members in knowing that, regardless of how difficult the operating environment, their Home Loan Bank will still be there.
The changes we have made to our capital plan enhance our ability to provide value to members, and the results of our stress test prove the sustainability of our model, but it is our dependability that is most important. Our advances are available each and every day, and we are proud to be a reliable funding partner for our region’s local lenders. We are there when you need us, and that is the true value of our franchise.■
José R. González is president and CEO of the Federal Home Loan Bank of New York. He joined the FHLBNY as its executive vice president in 2013, and became president in April of this year. Prior to joining the FHLBNY, he served on its board of directors for a decade, including serving as vice chairman from 2008 through 2013.