fhlbank atlanta 1 march 22, 2012 counterparty credit fhlbank atlanta gioa conference
TRANSCRIPT
FHLBank Atlanta
1
March 22, 2012
Counterparty Credit
FHLBank AtlantaGIOA Conference
FHLBank Atlanta
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Agenda• Overview of FHLBank System
• FHLBank Atlanta Shareholders
– Credit Analysis
– Risk Rating Models
• Unsecured Credit Analysis
– Derivative Exposure
– Fed Funds Exposure
– Ongoing Analysis and Monitoring
FHLBank Atlanta
System Overview• The Federal Home Loan Banks are cooperatives
created by Congress in 1932• Twelve regional Banks with nearly $770 billion in total
assets• Provide wholesale funding for more than 7,700 financial
institutions (shareholders)• Offers competitively priced financing, community
development grants, and other banking services• Regulator: Federal Housing Finance Agency• Debt issuer for System: Office of Finance
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FHLBank Atlanta
FHLBank System
New YorkBoston
Seattle
San Francisco
Dallas
Topeka
Des MoinesChicago
Indianapolis Cincinnati
Atlanta
US Territories: Puerto Rico, Virgin Islands, Guam
Pittsburgh
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FHLBank Atlanta
FHLBank Structure• Each FHLBank is a cooperative
– Shareholders purchase capital stock as part of membership
– Shareholders purchase stock to capitalize their borrowing
– Shareholders may receive dividends on their capital investments
• FHLBanks obtain funding by selling bonds
– Each FHLBank is jointly and severally liable for the FHLBanks’ consolidated obligations
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FHLBank Atlanta
Credit unions
Insurance Companies
Thrifts
Savings Banks
Comerical Banks
Community Development Financial Institution
FHLBank Atlanta Shareholdersas of September 30, 2011
766 Commercial Banks
42 Thrifts
97 Savings Banks
15 Insurance Companies
1,073 Total Members
152 Credit Unions1 CDFI
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FHLBank Atlanta
Shareholder Credit Analysis• Utilize Credit Risk Rating Models
– Bank model– Thrift model– Credit Union model– Insurance Company model
• Models developed in-house with use of external experts• Run models every quarter• Team of credit analysts prepare detailed credit write-ups
each quarter– Largest shareholders– Lower credit quality shareholders
• Credit Analysts adjust model scores for approximately 15% of the shareholders
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FHLBank Atlanta
Credit Risk Rating Model• Model assigns a rating from 1 through 10
(with 1 being the healthiest rating)– Based upon increasing probability of default– Four key factors
• Slow Loans: 30+ and non-accruals / total assets• Core Capital: core capital / average total assets• ROA: 2 quarters net income / total assets• Liquidity: government & agencies / total assets
– The four key factors account for 85% of the predictive power of the model
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FHLBank Atlanta
Impact of Credit Score 10
• Assigned a higher confidence level that results in more conservative discounts and collateral values
• May be required to physically deliver loan collateral and collateralize prepayment fees
• Credit availability may be reduced and borrowing terms may be restricted
• 160 Shareholders have failed since August 2008– All were rated a credit score 10 before failure– On average, shareholders identified as a 10 credit score
twenty months before failure
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FHLBank Atlanta
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Credit Score Overview
Number of Members by Credit Score December 2007 - December 2010
0
50
100
150
200
250
300
1 2 3 4 5 6 7 8 9 10
Credit Score Categories
Nu
mb
er
of
Me
mb
ers
12/31/2007 12/30/2008 12/31/2009 12/31/2010
FHLBank Atlanta
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Unsecured Credit Analysis• Unsecured Credit Positions
– Exposure related to derivative activities
– Exposure related to Fed Funds positions
• Unsecured Credit Monitoring and Reporting
– Overview of daily, weekly, monthly, quarterly and annual processes
FHLBank Atlanta
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• The Bank swaps the majority of its debt and advances (loans to shareholders) to LIBOR
• The Bank purchases interest rate caps and floors to manage interest rate risk exposure
• Collateral agreements are required on all derivatives and collateral delivery thresholds are established
• $140 billion notional as of 3Q 2011
– $13 million of unsecured exposure
Derivative Activity
FHLBank Atlanta
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• The Bank utilizes Fed Funds for liquidity holdings and investment of shareholder overnight accounts
• Fed Funds limited to “A” rated or higher counterparts
– A counterparty with long-term NRSRO rating on Negative Watch is automatically downgraded one notch
• Exposure to counterparties is limited to a percentage of capital
• Exposure averages $16 billion
Fed Funds Activity
FHLBank Atlanta
1414
• Formal annual reviews of unsecured counterparties are required per regulation and the bank’s Risk Management Policy
• Full list of 52 approved counterparties was reviewed and approved by the Bank’s Credit and Collateral Committee in January 2012
These annual reviews are supplemented with daily, bi-weekly, and quarterly monitoring and reporting
Unsecured Credit Monitoring
FHLBank Atlanta
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Management monitors the financial condition of the counterparties very aggressively; daily activities include the following:
• Monitoring of news, events and market indicators, most of which are tracked through an automated risk dashboard; Bloomberg information is fed directly into the dashboard
• NRSRO ratings are loaded automatically into an unsecured credit tracking system twice a day and risk levels are adjusted downward on a real-time basis
Unsecured Credit Monitoring
FHLBank Atlanta
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Bi-weekly activities include the following:• Equity and Debt Triggers – Counterparties are reviewed to determine if
their stock and debt prices decreased more than associated indices; triggers are set as follows: o (5%) over the preceding week
o (10%) over the preceding month
o (20%) over the preceding quarter
• A detailed analysis occurs when a trigger is exceeded; experience has shown this to be a leading indicator of an upcoming credit downgrade and management has used the results of the analysis to proactively downgrade counterparties; a recent example is shown on the next slide
Unsecured Credit Monitoring
FHLBank Atlanta
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Example of an equity trigger report:• On November 21, 2011, KBC Bank – KBC Group exceeded various equity
triggers:
• Based upon the volatility observed, management elected to block KBC’s overnight line; the term line had previously been blocked
• On December 21, 2011, KBC, along with its sovereign, Belgium, was placed on Negative Watch by Fitch; management effectively blocked the counterparty one month before the ratings agency took action
Unsecured Credit Monitoring
Time Period Trigger vs. Index
Actual Result Trigger Exceeded
Weekly (5%) (15%) Yes
Monthly (10%) (23%) Yes
Quarterly (20%) (36%) Yes
FHLBank Atlanta
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Monthly activities include the following:• Reporting to Credit and Collateral Committee of all exposures and
any upgrades and downgrades• Meetings are held with Liquidity Management to discuss on-going
strategies to dilute geographic concentrations and to discuss the approval of counterparties in countries that are under invested
• DV01 Limit exists and is regularly monitored; report is generated in the Treasury Area and both the Treasurer and CFO review the report and attest to its compliance on a monthly basis
Unsecured Credit Monitoring
FHLBank Atlanta
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Quarterly activities include the following:
• Detailed reviews of quarterly earnings and regulatory filings
• Monitoring of changes in Tier 1 capital in excess of 10% to ensure the appropriate limits are in place as well as to monitor interim financial performance
Unsecured Credit Monitoring
FHLBank Atlanta
2020
• There is no substitute for ongoing active analysis
– Use of “triggers” helps mitigate risk
• Can focus on a few key metrics to monitor counterparty strength
– Slow Loans, Core Capital, ROA, Liquidity
• Process can be time consuming and costly
Summary