Auto Lending Solutions: Q3 2019


May through October is considered the new-auto buying and lending season, and as a result you may have seen an increase in auto loan balances at your institution during this time. Year-over-year growth in auto debt balances continues to rise throughout the United States, as shown in Figure 1. Based on Q2 2019 data from the New York Fed’s Consumer Credit Panel, auto loans make up 9.4% of total debt in the United States — recently growing to $1.3 trillion as of Q2 2019 versus $0.91 trillion in Q2 2014. Is your institution prepared to handle auto loan portfolio fluctuations? The strategy described in this paper is a common approach given today’s low long-term interest rates and the uncertainty whether short-term rates will decrease.

Using a Blended Strategy to Hedge and Auto Loan Portfolio

In the current inverted yield curve environment, your institution can hedge its auto loan portfolio by taking advantage of low, long-term advance rates in order to increase net interest margin (NIM). By funding your portfolio with a combination of deposits and a ladder of longer-term advances, you can prepare for the uncertainty of future interest rates by locking in rates today. If the Federal Reserve lowers interest rates over the next several months, auto interest rates will likely fall as well. Your institution can take advantage of these low advance rates to hedge your auto loan portfolio by using a mixture of deposits and short-term advances. However, by adding a longer-term amortizing advance to the mix, you can lock in longer-term funding. When the amortizing advances pay down on schedule, you can meet your funding needs with short-term advances or deposits. For example (see Figure 2), a $5 million auto loan portfolio can be hedged with a combination of deposits, a 6-month fixed-rate advance at 2.05%, a 9 month fixed-rate advance at 1.97%, a 1-year fixed-rate advance at 1.99%, and a 5-year fully amortizing advance at 1.78% to mitigate interest-rate risk and maintain a starting NIM of 3.51%, assumingan auto loan rate of 5.36% (Federal Reserve’s Q2 2019 Consumer Credit report).* [*Rates as of August 23, 2019]

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Melissa Deven
Director, Member Strategy and Solutions

Ashish Tripathy
Managing Director, Member Strategy and Solutions


The scenarios in this paper were prepared without any consideration of your institution’s balance sheet composition, hedging strategies, or financial assumptions and plans, any of which may affect the relevance of these scenarios to your own analysis. The Federal Home Loan Bank of Chicago makes no representations or warranties about the accuracy or suitability of any information in this paper. This paper is not intended to constitute legal, accounting, investment, or financial advice or the rendering of legal, accounting, consulting, or other professional services of any kind. You should consult with your accountants, counsel, financial representatives, consultants, and/or other advisors regarding the extent these scenarios may be useful to you and with respect to any legal, tax, business, and/or financial matters or questions.

Federal Home Loan Bank of Chicago | Member owned. Member focused. | October 2019

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