Solutions Tailored to Members’ Liquidity Needs
FHLBank Chicago members across Illinois and Wisconsin face similar challenges to meet the unique needs of their customers while navigating regulatory requirements and managing their on-balance-sheet liquidity. Headquartered in Chicago, Northern Trust tailors their wealth management and lending services to each client’s specific needs. But their own needs are equally specific: While asset-driven banks require increased deposits and wholesale borrowings to support increased lending, Northern Trust’s balance sheet is primarily liability-driven, so the main driver of balance sheet changes is client deposits. And because Northern Trust has been designated to be large and complex by the Federal Reserve Banks, it is subject to increased regulatory protocols and must maintain a precise liquidity coverage ratio (LCR).
To maintain a strong liquidity position and risk profile, Northern Trust must find ways to support their lending activity by holding high-quality liquid assets (HQLAs). The loans they provide to their customers can be used as collateral to raise for HQLA purchases, and the converted advances must not fall inside the 30-day-to-maturity window LCR requirement. Since loans are not readily liquid assets, this can be a challenge. Financial institutions face the risk of not being able to raise sufficient funds or maintain collateral to meet balance sheet and contingent liability cash flow obligations when due, whether because of assumed firm-specific or market-wide stress event scenarios.
“Because we face challenges around managing regulatory liquidity requirements, being able to work with FHLBank Chicago to obtain competitively priced and customizable advances is very important to us. They provide solutions that support us in
both the day-to-day as well as the long term.”
Susan Swanson, Vice President, Treasury Senior Analyst, Northern Trust in Chicago, Illinois
The Right Solution for Each Member
The structure and pricing of an advance is the key to a great solution. In 2021, FHLBank Chicago’s Sales, Strategy, and Solutions team met with Northern Trust to find out which of the Bank’s variety of products offered the right structure and pricing to meet the member’s specific challenges. “Their team studied the regulations we face and designed a strategy that supports the time frame we needed,” said Swanson. In this case, the strategy relies on 90-day advances that can be repaid at day 60, avoiding the 30-day window. Northern Trust can then prepay the advances when closing and roll-over those terms to a new advance.
When a financial institution is borrowing cash and putting a term transaction on the balance sheet, pricing is critical. In addition to competitive pricing, FHLBank Chicago members who borrow from the Bank have access to activity stock, on which we have paid a higher dividend than membership stock since 2013. This higher dividend has the effect of lowering the overall cost of borrowing. Also, some of Northern Trust’s advances are under FHLBank Chicago’s Reduced Capitalization Advance Program (RCAP), so less capital is required for the advances.
Flexibility to Manage Short- and Long-Term Risk
“Northern Trust is thoughtful in maximizing our collateral pledges to find what’s eligible and works closely with FHLBank Chicago to ensure all of those loans can be eligible for pledging purposes for an advance and access to liquid cash,” said Swanson. However, she noted that Northern Trust also needs to consider their long-term funding profile and—looking forward to 2023—net stable funding ratio (NSFR) requirements. By working with members like Northern Trust to offer tools like one-year advances, FHLBank Chicago helps them create and maintain a stable, resilient funding concept to withstand unforeseen stress events.
Conversations That Drive Innovation
Swanson has found that conversations among FHLBank Chicago members often yield fresh ideas. Northern Trust is closely involved in FHLBank Chicago’s Member Advisory Committee, which offers Bank members a chance to discuss the advance solutions each institution is using. The Member Advisory Committee is made up of treasury and C-level positions among FHLBank Chicago depository members of various sizes throughout Illinois and Wisconsin. Since its creation in 2012, the Member Advisory Committee has generated enhancements to products and services that benefit member institutions both large and small.
“We sincerely enjoy having the opportunity to hear directly from other bank leadership on the strategies and use cases that are working for them,” said Swanson. “Combined with in-depth capital markets reports and value-added presentations from industry experts, these conversations help drive new ideas and next steps to improve our institution’s funding strategy.”