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FHLBank Atlanta. GIOA Conference. Counterparty Credit. March 22, 2012. 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.

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FHLBank Atlanta

GIOA Conference

Counterparty Credit

March 22, 2012


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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


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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 System

Seattle

Boston

NewYork

Chicago

Pittsburgh

Des Moines

Indianapolis

San Francisco

Cincinnati

Topeka

Atlanta

Dallas

US Territories: Puerto Rico, Virgin Islands, Guam


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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 Shareholders

as of September 30, 2011

1 CDFI

152 Credit Unions

15 Insurance Companies

42 Thrifts

97 Savings Banks

766 Commercial Banks

1,073 Total Members


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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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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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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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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


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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

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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

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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

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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

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Bi-weekly counterparties very aggressively; 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:

(5%) over the preceding week

(10%) over the preceding month

(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

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Example of an equity trigger report: counterparties very aggressively;

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

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Monthly counterparties very aggressively; 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

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Quarterly counterparties very aggressively; 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

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There is no substitute for ongoing active analysis counterparties very aggressively;

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

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