When I spoke to a trader at one of the two big banks that operate a covered bond platform in the U.S., he told me that his boss would always show a preference to Federal Home Loan Bank advances as long as there is no established covered bond platform in the U.S. Since then, I wrote an article that referred to advances from FHLB as being less efficient than covered bond financing. Well, the banks disagree. And in the spirit of balance and open dialogue in the financial markets, those concerns are republished below:
Someone forwarded an article you wrote the other day for HousingWire and I wanted to inquire about a statement about covered bonds compared to FHLBank advances. You wrote: The popular option for funding is through the Federal Home Loan Banks advances but that debt is seen as comparatively onerous as it is callable and the bank puts a super-lien on the assets. It is not really clear how advances can be stated to be "comparatively onerous" as there is no pricing benchmark to compare the two funding mechanisms. Call features of advances also are very unique to individual member funding strategies and it is not accurate to say all advances have callable features. It also remains unclear what capital requirements would be applied to a potential U.S. covered bond market, nor have a significant number of transactions been priced so it remains unclear what advantages covered bonds may have over FHLBank advances. Sincerely, Chris McEntee Director of Corporate Communications Federal Home Loan Bank of Atlanta
Jacob Gaffney is the editor of HousingWire. Write to him.