The bank borrowed almost $20 billion in the first half of the year from Federal Home Loan Banks, according to filings, almost as much as it got from selling dollar-denominated bonds in 2013. New York-based JPMorgan, with $2.4 trillion of assets, obtained most of the loans from the Federal Home Loan Bank of Cincinnati, whose 740 members typically resemble the $139-million-asset Bank of McCreary County in Kentucky and $40-million-asset Rural Cooperatives Credit Union.
Set up during the Great Depression to help community lenders, FHLBs raise cash by selling bonds viewed by rating companies and investors as backed by the U.S. government. Lending by the Congressionally chartered banks is climbing at the fastest pace since the start of the financial crisis in 2007. The growth has little to do with most of the 7,600 banks, thrifts, credit unions and insurers that are members. Without JPMorgan, Bank of America Corp. and Citigroup Inc., the three largest borrowers, lending by the FHLBs would be shrinking.
“It’s astounding,” said Joshua Rosner, an analyst at research firm Graham Fisher & Co. and co-author of “Reckless Endangerment,” a 2011 book, which focused on the role in the housing crisis of government-sponsored Fannie Mae. “It doesn’t seem to be in keeping with the system’s mission.”
FHLBs, cooperative institutions owned by their borrowers, were created in 1932 to provide savings-and-loan institutions with a way of tapping stable funding after a string of failures caused by runs on deposits. Their Washington-based trade group now says the aim “is to support residential mortgage lending and community growth in all areas of the country.”
In 1989, Congress allowed commercial banks to join the network, which comprises 12 regional FHLBs that raise money jointly in the bond market to fund lending to members and their investment portfolios. Because of the perception the government would step in to prevent a default, FHLBs can sell securities at yields similar to Treasuries and the bonds carry the top rating from Moody’s Investors Service and the second-best from Standard & Poor’s, the same as its U.S. ranking.
According to the FHLBs’ Reston, Va.-based finance office, outstanding debt for the FHLBs grew to $700.6 billion at the end of August from $687.9 billion on Dec. 31, making it America’s second-largest borrower in financial markets after the Treasury Department.
FHLB loans to members secured by mortgages and other assets, known as advances, climbed $37.1 billion in the first six months of 2013 to $450.7 billion, the latest disclosures show, with loans to JPMorgan, Bank of America and Citigroup expanding $44.6 billion. Total loans climbed a further $19 billion last quarter, Mesirow Financial Inc. strategist Ryan Graf estimated, based on bond issuance.
JPMorgan, a member of four of the FHLBs, joined the Cincinnati branch last year, after gaining the ability to become a member with the 2004 acquisition of Bank One Corp., whose chief executive officer at the time was Jamie Dimon.
As head of JPMorgan, Dimon steered the lender through the housing crash, making it the only major U.S. bank to remain profitable throughout the period. He’s since pushed back against regulations designed to avoid bailouts for the industry and the perception that financial behemoths are too big to fail.
While most banks, including JPMorgan, have repaid loans and investments provided by the government during the crisis, they continue to benefit from other federal initiatives, including the FHLBs and insurance on customer deposits of up to $250,000, a limit temporarily raised from $100,000 during the crisis before later being made permanent.
JPMorgan’s loans from the Cincinnati FHLB increased 64% to $42.7 billion in the first half of this year as its total FHLB borrowing climbed to $61.8 billion from $42 billion.
The bank stepped up its borrowing as it sought to use longer-term funding to add to its cash and similar investments to meet new liquidity rules called for by the international Basel III agreement, according to a person familiar with the company’s operations. The loans, which can cost less than similar-maturity unsecured debt, are backed by mortgage collateral, said the person, who asked not to be named because the details are private.
JPMorgan has issued $19.9 billion of senior dollar- denominated bonds this year, according to data compiled by Bloomberg.
Justin Perras, a JPMorgan spokesman, declined to comment.
The Basel III rule was created to better prepare banks for market disruptions such as the upheaval that followed Lehman Brothers Holdings Inc.’s collapse in 2008. JPMorgan has exceeded the amount of liquid assets needed to meet the new rule since the second quarter, treasurer Sandie O’Connor said at a recent CreditSights Inc. event, according to the research firm.
The bank isn’t alone among its peers in taking advantage of FHLB funding.
Bank of America, which is a member of five FHLBs, increased its advances by $19.4 billion to $33.8 billion during the first half, while Citigroup, which belongs to three, boosted the amount by $5.3 billion to $25.7 billion, disclosures show.
“We’re constantly borrowing across multiple alternatives to maintain flexibility and efficient funding,” Jerry Dubrowski, a spokesman for Bank of America said in a telephone interview.
Citigroup’s growth, focused on short-term borrowing, was to prepare for a loss of deposits from Smith Barney customers, after it agreed to sell its stake in the brokerage to Morgan Stanley, according to a securities filing. Mark Costiglio, a spokesman for New York-based Citigroup, declined to comment.
Borrowing by the largest banks is vital to the system, because it creates a “deep and liquid” market for FHLB bonds, which are used to fund loans to all members, said John von Seggern, president of the Council of Federal Home Loan Banks, the system’s trade group.