YouSaid · the spoken record

Dan Siciliano

lines on the record: 79
first: 2023-12-11
most recent: 2023-12-11
sittings or episodes: 1
sources: podcast

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“So you've talked a lot about this banking accounting convenience slash problem, which is the available for sale and hold to maturity difference, right? And that's a big focus of what's happened in the banking system last year. Well, we don't have those designations in the same way. But when we decide to, let's imagine a scenario we actually had to take collateral. If we decide that that collateral is going through an intermediate phase of lower value, we have the option of truly holding to maturity like we have a lot of flexibility that say a small community bank would not have a regional bank would have, and even sometimes really big banks. So again, when I think we talk about reforms to the system, the system welcomes. Just because it's worked really well for 90 years, which it has, doesn't mean there aren't a lot of lessons to be taken and then, you know, make update a system. Like if you're going to be 100 years old, I hope you're a lot different from how you operated 30 years ago.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“At the time that advances are made and clarified, or I should say at the time that collateral is assessed because sometimes advances are made after the fact, obviously it's kind of marked to market and then you have this process that Michael just described. So there's never a surprise that, oh, that was a thousand dollar face value, but really it was $932. Boy, we shouldn't have started from $1,000. We don't start from the thousand. We start from the 932 because we assess it correctly at the time. And then I do want to point out this idea of having the haircut and other strategies, what you would worry about, I think in a risk scenario, one would be a temporary serious shock to the system that somehow decreases the value of holdings across the board or does all sorts of things. Great financial crisis. Now, one of the things to keep in mind for the federal home loan bank system is that we are very well capitalized and our dynamics of how we operate means that by and large we aren't pressured to live.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, Depending upon the methodologies that individual banks use, we're going to provide a value to the collateral, certainly if there's more volatility in the marketplace, you're going to see a broader dispersion and certainly larger haircuts associated with the collateral itself. So is interest rates are increasing, the value of the collateral being pledged would decrease, especially if they're fixed rate type of loan collateral that's being pledged. So you have that and then volatility would create larger haircuts on the collateral itself because there's a greater dispersion of potentially a change in values of that collateral. So those two in sync would reduce the value overall.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“The one caveat I would say is that if the loans are not performing, those loans would not be eligible to be pledged as collateral. And so they would have, the member would have to provide us eligible collateral to, in essence, top it off. So that's just a nuance to what you're saying. So if the loans were all in default, we wouldn't accept that as collateral. They would have to pledge performing based loans, a pool of performing based mortgage loans for us to accept. And then we provide a value on top of those mortgage loans.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“So if a pool of loans that is used as collateral for an advance, if some percentage of those loans go bad, the federal homeland bank is protected by the haircut. They only lend 70% and the collaterals is 100%. So it would have to go below that floor in order for the federal home loan bank to experience a loss, which I'll remind our audience they never have.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“And that would apply a haircut on top of the collater That's being pledged to us. All of these factors play into managing the risk. Exposure, credit risk exposure from lending. The members are also pledging. They're setting aside capital stock for that as well. So, all of those components together function as a buffer to protect the federal home loan banks. In case there is On the Itself. So that just provides a very high level view on how we're managing. The credit risk as a whole.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“Have blanket lean on the Collateral Collateral is Federal Home Of those cases provide us. Protect To manage the Loss, the collateral that's being pledged has to be performing basically. Eval Character”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“Our own Congress almost defaulted on our own sovereign debt, right? Like, I'm just not sure what people are thinking about how great the GSE thing is. I think what they are looking at is how in the world do we do what you just asked, Jack, which is, all right, we do all these advances and we get this collateral. I mean, how safe is that really? Michael can answer that better than pretty much anyone on the planet. So I'll shut up.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“Do it to the shareholder. You had all of these incentives, right? To potentially take risks and to lean on the GSE status. In our scenario, Michael just referenced this self-capitalizing method, right? That means that every member, you know, small community bank, big mega bank, credit union who participates as a member has their resources, their capital locked up inside our bank. And if they want to expand their advances, they're going to have to put even more capital in. And so it's a very different incentive structure. And I would posit that there is value to the GSE, but it is not the kind of thing where a potential bond buyer shows up and says, hey, if you didn't have this stamp, I wouldn't be buying. And so I think we're going to explore that as time moves forward. And again, I don't know how much the global bond market puts in terms of emphasis on a GSE designation in an environment in which”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“So, I'm going to let Michael answer the technical part of that because it is, in fact, a fairly technical process that has been refined over the last several decades. And the Federal Home Loan Banks, each bank has a modestly different treatment, but by and large, we behave the same way. But I do want to answer one big picture question, which is, again, when there's an offering in the global bond market by what we call our Office of Finance, it's the centralized conduit through which all the 11 banks make their offerings. Those buyers of that debt, what are they thinking? Are they thinking, I wouldn't buy this unless there was a GSE guarantee? Are they thinking, hey, this would be something I'd probably buy. And I feel even better because there's a GSE guarantee. And I do think that's one of the conversations that's going to be ongoing in the next six to 18 months as we work through the FHFA report. It is clearly different from when like Fannie and Freddie, when they were publicly traded entities, you had this concept.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I would say federal home alone, a federal home loan bank sort of going down. It's in between, it's less preposterous than the Federal Reserve going down because the Federal Reserve truly can and does print money, whereas the federal home loan bank funds itself by issuing bonds that are treated by the market, as you say Dan, in a very similar nature to the Treasury. But Dan, I know Fannie Mae went under, it had the government guarantee, and that's kind of why it went into conservative strip. The government took it over so that investors around the globe, Chinese investors, Japanese investors who bought Fannie Mae debt, they would still be sort of made whole. But I know the reason Fannie Mae, they had credit issues of they owned a lot of subprime mortgage bonds. Can you talk about how the federal home loan bank systems handle credit issues given that most of its assets are advances to banks, which have a credit risk, but they are securitized by Morris-Back securities.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“To add one thing with what Dan is saying, just for your listeners, what makes the federal home loan banks unique is that we have a self-capitalizing nature of the balance sheet itself. And so when Dan is talking about the banks expand and contract, we can do that because the advances of our members are self-capitalized by our member institutions as they borrow. They're buying capital stock. So that helps to. The balance sheet expand and contract It's also a good risk management tool as well. So just to provide more clarity. Sorry, Jack, I'll turn it back to you.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“Really, really wrong. So that's not really what's in play. I think one of the questions that has come up is what role do we play as very strong institutions who have capital to lend? What do we play, what role do we play when there is stress in the system? When there are members that went from very, very strong to less strong, what is it that we should be doing at that moment? It's not so much a question about will we be okay. I don't think we should ever take that for granted, but that is way down on the list of everyone's concerns. The question is, what do we do with our members when they are”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“Organization that again it's advancing almost all the time on the clear credit worthiness of our institutions, credit unions or banks. And then, of course, we secure it with this collateral, which the federal home loan bank system is arguably the best in the world at assessing that collateral understanding it, appropriately giving haircuts. And so the concerns moving forward, and maybe there's a transition maybe a little bit to what the system recommendations are, I don't think anyone is particularly saying that there's active anxiety about the federal home loan banks themselves. That really almost never comes up. Like the notion of us running into trouble, we kind of a funny joke, which is by the time the federal home loan banks themselves somehow blow through their tremendous amounts of capital, don't get the cloud right. By the time that happens, you and I, Jack, are like running for a different border. Like, you know, it's gone.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, and again, all of these organizations are supervised by the FHFA. But of course, Fannie and Freddie, and this is a really important distinction, in my opinion, are inconservatorship, right? Like they blew up, nearly took down the global economy, took us to the brink, and now they are being appropriately all but run by, right? The regulatory agency. During that same time, the federal home loan bank system did not take us to a brink, to the brink. They instead advanced a lot of capital to otherwise strong institutions who then survived the great financial crisis and lived to fight another day. And hand in hand with all those regulators, the Fed as well as the FDIC and others, the federal home loan bank system, again, if you go back and look at the history, obviously advances went up and up and up and then moderated down, went up a little more, went down. So yeah, it's a tale of really, in my opinion, a very dynamic.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“Teleported into a different dimension and simply disappeared. And the federal government suddenly had to face the choice of covering that. Would Congress pass a bill to allow a $1. something trillion dollar coverage? I don't know, right? And I would say that the global bond market is certainly smarter than I am and their responsiveness, the current environment, says that they have really good faith in the federal home loan bank systems, right? Like as you follow those issuances. By the way, if people want to follow the banks more closely, we are SEC registrants, right? So we're filing quarterly. There's a consolidated, you know, filing as well. There's a lot of stuff out there. And I think it is worth paying attention to.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“For our member banks. And by the way, you're exactly right on the GSE structure. I tend to tongue in cheek say, yeah, yeah, but one additional point is we've never had a dollar loss in the system. And it's actually hard to tease out. And if any academic out there wants to make a career on this, please happily reach out to me. It's just my last name at Stanford.edu. I'm happy to point in the right direction. The question is, hey, how much benefit do we really get on the global markets? How much is that in terms of the few basis points above treasuries that we're getting? How much is that is because the system design, lots of layers of redundancy, really well capitalized federal home loan banks, you know, no history of dollar loss versus how much of that is the GSE implied guarantee. And it's really hard to know. There's obviously some specific value to the GSE implied guarantee, but I don't know about you, but if magically the federal home blown bank system were”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“And Jack, it's worth saying, and Michael, call me on this if I don't get this exactly right. I might get a regional difference here, but the federal home banks, when we say they're in good health, one of the indicators I think that anyone can observe is that they expand and contract in synchronicity with the needs of their members. In other words, it isn't all that unusual for advances to grow and then to shrink back after a quarter or two and then to grow again. Now, of course, 2023 was somewhat extraordinary, but by not as much of a quantum as you would think, I think one of the things that we've been trying to point out as people appropriately pay more attention to the system is that for 90 years, it's been working really well. And it has had many cycles of modest to extraordinary increase of advances that then contract over time. In fact, that's kind of one of the main points of our functions is that we are available for intermediate and short-term liquidity.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, the trend has continued, so advanced levels have come down in general, and also the funding, the funding levels certainly have come down as well. But funding is dependent upon a number of needs on the balance sheet as well. So advances is one component of that. There's other reasons why federal home loan banks are issuing debt in the marketplace, but by and large, advances being the core mission of our institutions that drives a lot of the insurance activity that we see. And so as that has come down, the issuance levels have come down as well.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“From March, we certainly were at a peak of advances and advances activity. What we've seen now is loan demands have dropped off as deposit base started to stabilize. The advances that had been taken out back in March were at all-time highs. Those have been paying down. So the level of advance is outstanding across the federal home loan banks have also come down from the height of the crisis back in March of this past year.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, thanks for the. Bring that up for just to clarify it's loaned. Loans that they are making to their customer base. So that's part of their core business making loans. What we're seeing is they're Steps to manage their credit risk exposure and doing other things to tighten their credit standards. They tighten their credit standards, they are doing less lending Other borrowers, be it consumers, be it other small businesses, agricultural lending, et cetera, they're pulling back on the lending. They're doing And so that just impacts then the growth in the economy and everything else. So, that's what we're seeing. Their load to me and dropping off. Certainly from”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“So you said the strength of the federal home loan banks is a financial condition is strong. I would say for our audience, it is not a government entity, Dan, as you reminded us, but it does have an implicit guarantee of the U.S. government similar to Dan can correct me on the legal difference if there is a difference, but Fannie Mae, Jenny May, so federal home loan banks can issue bonds at quite a low rate, some amount of basis points above what the US government can issue via treasuries and then loan those back to member banks who are commercial banks and other institutions in the form of advances. So whereas commercial banks can issue, can enter struggles that has a government association encountering financial difficulties, it's fundamentally different from a commercial bank encountering difficulties.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“Dropping off from where we had seen the low demand back in 2022, especially as interest rates have increased, we would expect that to occur. And that's certainly playing out from a loan demand perspective on our members' balance sheets. The other thing that we've seen is the deposit outflows have stabilized by and large, and so we're not seeing that large outflow that we had seen back in March of this year. So that's also a positive. On the credit side, I think you do, you're starting to see on the On just consumer loans and other things, just more delinquencies picking up. So that's a harbinger of probably more credit losses that we could potentially see from depository member institutions coming into 2024. But overall, I think the strength of the system is certainly well intact We're here to serve our members in the future.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“Certainly, Jack, in regards to the strength of the financial system, I would say that the federal home loan banks are really in a position of strength or in a position of strength back in March of this year during the banking crisis that we had seen. We're certainly in an area of financial strength as we sit currently. All 11 federal home loan banks are well capitalized. We're well positioned to serve and meet the liquidity needs of our members in our district. So we're really financially strong. What we're seeing in the banking sector more broadly, though, is one, the loan demands in a lot of places have started to drop off. And so our depository institutions are seeing less loan demand, be it consumer, commercial, et cetera.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“Have small banks or big banks, we have a very wide cross section, and that includes to a certain extent CDFIs, it includes insurance companies, but the bulk of our members tend to be banks and credit unions. Some of them are small community banks, some are medium-sized regional banks, and of course we have some very large mega banks. And so that's where we sit in the ecosystem. That's what we do. Michael, of course, is the CEO of the Chicago Bank, which kind of has an important footprint. And maybe he can comment on the, hey, what are the patterns been recently? What are our members doing? Are they taking more advances, fewer advances? What's that look like?”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“But these co ops run and we borrow through consolidated function. We borrow funds by issuing bonds at the global level and we do it through a particular unified system. And then we take that capital and we advance it to our members. We call them advances and we use this collateral mortgage related assets. And so that's ongoing. Those 11 districts, for example, San Francisco's California, Nevada, Arizona, an exciting time for California this year in terms of some of our institutions. But that function is why I think it makes sense to ask, hey, what's the scenario look like these days as opposed to six months ago? Because we're pretty close to the ground, right? Even though this is all private capital and we are GSE, what we advance and the pattern those advances, whether the advances are going up or going down, it says a lot about the banking and financial institutions in the country. And as importantly, we don't just”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“Sure, I'll let Michael expand on kind of the pattern and the pacing of the advances and kind of the activity that's going on and have him draw some conclusions about banking. Maybe for people who haven't paid a lot of attention to the federal home loan bank system, I'll just do a 30 second overview and kind of where we fit in the narrative these days compared to six months ago or six years ago. As you mentioned, there is some function that feels and looks similar to the Federal Reserve, but we are different in that the federal home loan bank system is a system of banks, essentially banks for banks, but not just banks, but credit unions and other financial institutions. And though we are regulated and appropriately so, closely regulated by the FHFA, we are not ourselves a federal entity. It's actually a gathering of private capital and we, each of the 11 banks operate as essentially co-ops. And we are federally chartered, supervised by the FHFA.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“First, I just want to start off with the sort of overall health of the banking system and of the federal home loan bank system. And I should say for our viewers, federal home loan bank system, much less known and understood than the Federal Reserve, but it plays a huge role in the commercial banking system in terms of funding, funding banks, which are called advances. So yeah, Dan first, and then you, Michael, just overall general comments on health of the banking system and the federal home loan banking system on in early December, Monday, December 4th, whereas I believe we recorded our prior conversation at a time of much greater uncertainty.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT
“Admittedly, it's a low bar in many cases for any region's banking scenario is that 2024 will hopefully be better than 2023. But yeah, clearly so. Isn't that everyone's goal for the next year to do better than the prior year? But I think one of the things that we'll see is improved transparency and probably all things equal in our region, a little bit more stability than we've even had these last six months.”
2023-12-11 · Forward Guidance · The Banking System Is Healing | Dan Siciliano & Michael Ericson · IDENTIFIED FROM THE TRANSCRIPT