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Federal Home Loan Bank of Seattle Federal Home Loan Bank Advances One Source of Liquidity

The Federal Home Loan Bank System. Chartered by Congress in 1932 Government-sponsored enterprise (GSE) to ensure that financial institutions have access to adequate funds they can use to lend for mortgagesTwelve Regional FHLBanksEach FHLBank owned by member-shareholders and operated independently (Cooperative ownership)All federally insured depositories and insurance companies engaged in residential housing and/or community financial institutions are eligible.More than 8,100 total bank, thr30095

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Federal Home Loan Bank of Seattle Federal Home Loan Bank Advances One Source of Liquidity

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    1. Federal Home Loan Bank of Seattle Federal Home Loan Bank Advances – One Source of Liquidity Rick Riccobono, President and Chief Executive Officer February 11, 2009

    2. The Federal Home Loan Bank System Chartered by Congress in 1932 Government-sponsored enterprise (GSE) to ensure that financial institutions have access to adequate funds they can use to lend for mortgages Twelve Regional FHLBanks Each FHLBank owned by member-shareholders and operated independently (Cooperative ownership) All federally insured depositories and insurance companies engaged in residential housing and/or community financial institutions are eligible. More than 8,100 total bank, thrift, credit union, and insurance company members. AAA credit rated by Standard & Poor’s and Moodys Regulated by the Federal Housing Finance Agency

    3. FHLB System Map

    5. Federal Home Loan Bank System Debt Ratings FHLB debt securities (also known as consolidated obligations or COs) are rated by both Moody's and Standard & Poor's. All long-term debt issued by the FHLBanks is rated ‘Aaa’ by Moody's and ‘AAA’ by Standard and Poor's. All short-term debt is rated ‘P-1’ by Moody's and ‘A-1+’ by Standard & Poor's. The BIS-risk weighting is 20% in most countries. These outstanding ratings reflect the FHLBank System's financial strength, sound management, low derivatives risk exposure, status as a Government-Sponsored Enterprise and other links to the U.S. government. Why advances? Liquidity is certainly key. It comes from hard-fought deposits, investment liquidation and reliable sources of wholesale funding. It’s not measured just by loans-to-deposits, or volatility – it’s ideally measured on a cash flow plus availability basis. Liquidity is also about funding asset growth, controlling interest rate risk and looking at a balance sheet as a sum of the parts. These days, with liquidity being fought in the trenches, it’s good to have advance availability as part of a well-coordinated and decision-based balance sheet management process. Why advances? Liquidity is certainly key. It comes from hard-fought deposits, investment liquidation and reliable sources of wholesale funding. It’s not measured just by loans-to-deposits, or volatility – it’s ideally measured on a cash flow plus availability basis. Liquidity is also about funding asset growth, controlling interest rate risk and looking at a balance sheet as a sum of the parts. These days, with liquidity being fought in the trenches, it’s good to have advance availability as part of a well-coordinated and decision-based balance sheet management process.

    6. Federal Home Loan Bank System Debt Quality Ratings Rationale Lending agreement with the US Treasury for a contingent liquidity borrowing facility The System has GSE status and inherent financial strength "Joint and several liability...provides significant support" (Moody's) "All advances (loans) to members are overcollateralized" (Standard & Poor's) These secured loans represent 71% of assets at September 30, 2008 "Excellent asset quality" (Moody's) "Conservative risk-adjusted capitalization" (Standard & Poor's) The System's liquidity has been strong (Moody's) "Excellent asset quality" (Standard & Poor's) "Credit risks are being managed well" (Moody's) "Funding flexibility is superior" (Standard & Poor's) Regulatory capital-to-assets ratio of 4.4% at September 30, 2008 Links to U.S. Government Created to serve a public purpose Recognized for its actions during the current credit crisis Authorized by the Federal Home Loan Bank Act, as amended Regulated by the Federal Housing Finance Agency (FHFA) Eligible to tap the GSE Credit Facility The Fed is currently active in purchasing FHLBank debt Interest on FHLB debt securities exempt from state and local income tax Contributes hundreds of millions of dollar annually (out of earnings) towards U.S. affordable housing Pays hundreds of millions of dollars annually to support the savings and loan deposit insurance fund Debt issuance subject to U.S. Treasury approval Fiscal agency agreement with Federal Reserve Eligible for collateral for certain public deposits Eligible for investment by national banks and thrifts Why advances? Liquidity is certainly key. It comes from hard-fought deposits, investment liquidation and reliable sources of wholesale funding. It’s not measured just by loans-to-deposits, or volatility – it’s ideally measured on a cash flow plus availability basis. Liquidity is also about funding asset growth, controlling interest rate risk and looking at a balance sheet as a sum of the parts. These days, with liquidity being fought in the trenches, it’s good to have advance availability as part of a well-coordinated and decision-based balance sheet management process. Why advances? Liquidity is certainly key. It comes from hard-fought deposits, investment liquidation and reliable sources of wholesale funding. It’s not measured just by loans-to-deposits, or volatility – it’s ideally measured on a cash flow plus availability basis. Liquidity is also about funding asset growth, controlling interest rate risk and looking at a balance sheet as a sum of the parts. These days, with liquidity being fought in the trenches, it’s good to have advance availability as part of a well-coordinated and decision-based balance sheet management process.

    7. The Seattle Bank Mission: “To provide liquidity, funding and services to enhance our members’ success and the availability of affordable homes and economic development in their communities.” Advances address liquidity and balance sheet management needs of members. Affordable housing and economic development funds offer direct subsidy grants and low-interest loans to members and non-profit organizations.

    8. The Seattle Bank Federally chartered, member-owned cooperative –1964. All federally insured depositories and insurance companies engaged in residential housing and/or community financial institutions are eligible for membership. Purchase of stock required for membership and advance activity. Members are assigned credit lines and are eligible for dividends. 380 members.

    9. FHLB Seattle Business Profile

    10. Increased Focus On Credit Risk Some logical questions focusing on member credit and collateral management practices at the FHLBanks: Who can borrow from the FHLBanks and how do you evaluate their creditworthiness? What types of collateral do the FHLBanks accept and how is it valued? What is the credit quality of the mortgage programs and MBS investments? What are the FHLBanks’ exposure to subprime and non-traditional mortgage collateral?

    11. Liquidity, Interest Rate and Credit Risk Management Advances and liquidity investments: Generally manage interest rate risk on a transactional basis Use debt and derivatives to hedge interest rate risk Conservative credit risk tolerances and profile Advances – all over-collateralized with perfected security interest Credit Risk Management: Physical Possession, Borrowing Restrictions, Collateral Verification and Monitoring MPP assets – all credit enhanced to AAA-equivalent, using cash reserve and mortgage insurance Investments and Derivatives – highly rated securities and counterparties

    12. Seattle Bank: Multiple Liquidity Sources Liquidity Risk: “The risk that we may be unable to meet our financial obligations as they come due or meet the funding needs of our members in a timely, cost effective manner.” Primary Sources: New COs, Short-Term Investments Secondary Sources: Fed Funds, R/P, Capital, Member Deposits, Lines from U.S. Treasury Contingent Liquidity Requirement: Contingent Sources: (cash, self-liquidating assets, the borrowing capacity of AFS securities, lines of credit) must exceed Contingent Needs: (advance commitments, maturing FF and R/P, maturing COs, “in-the-money” callable COs, mortgage loan commitments, securities settlements, other forecasted obligations).

    13. The Seattle Bank’s Historical Role in Providing Member Liquidity “Raising Funds Quickly, without Principal Loss at a Reasonable Cost” (…Darling Consulting Group) Balance Sheet Liquidity = On-Balance Sheet Liquid Assets Strategic Reserve = Coverage of Deposit Volatility “Just-in-Time Inventory” = FHLB Seattle Bank Availability (Collateral Management and Contingent Liquidity Planning) Catastrophic Insurance = Federal Reserve Bank

    14. Rationale for Advance Usage Liquidity management Funding loan growth Asset/liability management Transactional micro hedges Balance sheet macro hedges Minimizing liability costs Wholesale leveraging Why advances? Liquidity is certainly key. It comes from hard-fought deposits, investment liquidation and reliable sources of wholesale funding. It’s not measured just by loans-to-deposits, or volatility – it’s ideally measured on a cash flow plus availability basis. Liquidity is also about funding asset growth, controlling interest rate risk and looking at a balance sheet as a sum of the parts. These days, with liquidity being fought in the trenches, it’s good to have advance availability as part of a well-coordinated and decision-based balance sheet management process. Why advances? Liquidity is certainly key. It comes from hard-fought deposits, investment liquidation and reliable sources of wholesale funding. It’s not measured just by loans-to-deposits, or volatility – it’s ideally measured on a cash flow plus availability basis. Liquidity is also about funding asset growth, controlling interest rate risk and looking at a balance sheet as a sum of the parts. These days, with liquidity being fought in the trenches, it’s good to have advance availability as part of a well-coordinated and decision-based balance sheet management process.

    15. Quantifying The Seattle Bank’s Role in Providing Member Liquidity Liquid Assets (unpledged securities) less Potential Deposit Volatility (% of maturing deposits) plus Available Seattle Bank Borrowing Capacity (lesser of availability under credit line or collateral) plus Net Brokered CD Policy Access = LIQUIDITY SURPLUS

    16. A Forward Look at Liquidity…. LIQUIDITY SURPLUS Less Net New Loans Plus Changes in Deposit Growth Plus Non-Liquid Securities Maturities = Liquidity Forecast (….and the starting point of contingent liquidity planning)

    17. Effective Liquidity Management Flow

    18. FHLB System Products and Services Credit Products and Services Wholesale Advances Letters of Credit Technical and Educational Support Cash Management and Safekeeping Community Investment Programs Housing grants Below posted rate advances Long term forward interest rate locks Why advances? Liquidity is certainly key. It comes from hard-fought deposits, investment liquidation and reliable sources of wholesale funding. It’s not measured just by loans-to-deposits, or volatility – it’s ideally measured on a cash flow plus availability basis. Liquidity is also about funding asset growth, controlling interest rate risk and looking at a balance sheet as a sum of the parts. These days, with liquidity being fought in the trenches, it’s good to have advance availability as part of a well-coordinated and decision-based balance sheet management process. Why advances? Liquidity is certainly key. It comes from hard-fought deposits, investment liquidation and reliable sources of wholesale funding. It’s not measured just by loans-to-deposits, or volatility – it’s ideally measured on a cash flow plus availability basis. Liquidity is also about funding asset growth, controlling interest rate risk and looking at a balance sheet as a sum of the parts. These days, with liquidity being fought in the trenches, it’s good to have advance availability as part of a well-coordinated and decision-based balance sheet management process.

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