Financial Intelligence

Collateralize Municipal Deposits
with Letters of Credit

Published in NJ Bankers Magazine, Issue 2, 2021

Article by Thomas Settino, Vice President and Director of Member Relations, FHLBNY

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The Federal Home Loan Bank of New York (FHLBNY) Municipal Letter of Credit (MULOC) product allows qualified depository institution members to collateralize municipal deposits with a low-cost letter of credit secured by whole-loan mortgages and/or securities.  The MULOC is an efficient form of collateralization and offers significant benefits to municipalities, our members, and the communities that these entities serve.

The MULOC is a collateralized instrument issued by the FHLBNY, a highly-rated financial institution, guaranteeing payment on behalf of its customer (FHLBNY member institutions) to a beneficiary (a municipality or the New Jersey  Department of Banking and Insurance (NJ DOBI) under the Governmental Unit Deposit Protection Act program) for a stated period of time and under certain conditions.  The FHLBNY is a highly-rated, congressionally chartered, wholesale bank within the national Federal Home Loan Bank System. We are currently rated “Aaa” and “AA+” by Moody’s and Standard & Poor’s, respectively. These ratings are equivalent to those assigned to the U.S. Government.

Key Benefits of the FHLBNY’s MULOC

1. Creates Operational Efficiencies

• Positive Impact on On-Balance Sheet Liquidity – Through the MULOC program, members may utilize their whole-loan mortgages to collateralize municipal deposits instead of encumbering highly liquid securities collateral.
• Collateral Monitoring – The notional amount of a MULOC will not change during its term. There are no security market valuations to monitor nor are margin calls required.
• Event of Default – In the event of default by the member depository institution, the beneficiary would simply submit a letter of credit draw certificate to the FHLBNY for immediate payment; there would be no securities to liquidate and therefore no market risk to bear by the beneficiary.

2. Benefits Communities and Bottom Line

• Deposit Proceeds for Lending Within Communities – MULOCs allow financial institutions to use municipal funding for lending back into their respective communities, instead of using the liquidity to finance securities collateral.

• Bottom Line Impact – Financial institutions’ profitability can be enhanced by deploying liquidity into higher-yielding loans, instead of lower-yielding securities collateral, enhancing earnings and capital.

3. Reduce Overcollateralization with the Refundable MULOC (REMLOC)

• Tightly Manage Collateralization – Members may utilize REMLOCs to secure deposits with fluctuating balances. Members may book a notional value of a REMLOC that is greater than the average balance of the underlying deposit accounts and can apply for a refund for the unused¹ portion of the letter of credit at the end of its term.

On the day of booking a MULOC, the municipality or NJ DOBI will receive the Letter of Credit via email.  In the unlikely event that the FHLBNY’s member defaults on its commitment, the beneficiary of the MULOC/REMLOC can submit the draw request directly to the FHLBNY for prompt payment.

“The FHLBNY’s letters of credit are widely recognized by its membership and the municipalities, which we collectively serve, as a highly reputable and efficient tool to collateralize municipal deposits,” Steve Primiano, SVP and Treasurer at ConnectOne Bank in Englewood Cliffs, NJ, commented. “We have always viewed the utilization of FHLBNY’s Municipal Letter of Credit, or MULOC, as a cost-efficient way to optimize our deposit collateralization while maintaining the high level of assurance our municipal client base expects.  The MULOC program allows us to significantly maximize the liquidity on our balance sheet, particularly towards maintaining higher levels of unencumbered liquid securities, and further, with the refundable MULOC program, maintain adaptability to respond to our clients’ changing collateral requirements on a regular basis. The MULOC empowers us to maintain our client-first focus by serving our communities through deploying our municipal deposits back into community-focused lending initiatives rather than lower-yielding securities for collateral.”

The FHLBNY is there for its members in all operating environments providing both on and off-balance sheet liquidity – On-balance sheet via our robust suite of advance products and off-balance sheet through our municipal deposit collateralization program and via our secondary mortgage outlet called the Mortgage Asset Program® (MAP).

If you would like additional information regarding FHLBNY letters of credit or any other product offering, please contact your relationship manager or Member Services Desk at 212-441-6600.

¹ If the notional value of the REMLOC exceeds the average balance of the underlying municipal deposit account(s), a member may apply to receive a refund of up to 30% of the initial fee of the REMLOC.