Meeting Future Funding Needs with the Forward Starting Advance

One of the primary benefits that FHLBank Boston offers its members is access to on-demand funding. In most cases, that means that when a member has intermittent cash management needs or is looking to fund asset growth, they can turn to advances at the point on the curve of their preference and receive funds immediately. 

However, as balance sheet liquidity and market conditions ebb and flow, there are times when funding rates may look attractive but the member may not have a current need for any incremental funding. The Forward Starting Advance offers the ability to take advantage of current rates that may present some relative value while delaying the disbursement of funds to better align with balance sheet needs.

Consider the chart below which highlights a recent special Forward Starting Advance offering, alongside two Classic Advances for comparison.

In this example, there is a six-month period between the Forward Starting Advance transaction date and when the funds are ultimately disbursed. Once disbursed, the member has an 18-month Classic Advance, maturing 24 months from the original transaction date. During the six-month period, members do not have to purchase activity stock or use available collateral, as is required for advances that are immediately disbursed.

Even though funds are disbursed six months into the future, the rate on the Forward Starting Advance is driven by the level and shape of the current yield curve. The member can secure funding for months 6-24 at a rate below that of the current two-year advance without adding the cost of the liability for months 0-6, when it may not necessarily be needed or wanted.

Given current conditions, the Forward Starting Advance might appeal to a member who may not need additional funding now but wants to benefit from historically low interest rates while guarding against the normalization of cash levels in the coming months. More specifically, below are some ways that members can benefit from using the Forward Starting Advance:

• Anticipated accelerated loan growth: As the economy reopens and both consumers and businesses ramp up spending and borrowing, the Forward Starting Advance allows a member to lock in funding rates now for future disbursement, where further steepening of the yield curve would benefit eventual asset yields without impacting liability costs.
• Potential deposit outflows: The surge in deposits has been extraordinary, and many institutions right now find it challenging to gauge just how sticky these deposits may be since there is no historical precedent. For a member looking to hedge the risk that the volatility of deposit flows may remain as high on the way out as they were on the way in, the Forward Starting Advance may be a useful tool.
• Replacing maturing Certificates of Deposit (CDs) or borrowings: For members with maturing CDs, advances or wholesale borrowings, the Forward Starting Advance can be used to avoid the market risk of waiting until maturity to replace the funding.

​A few of these benefits are also explained in a recent case study.

While the Member Funding Desk regularly promotes special advance offerings of specific structures, all variations of the Forward Starting Advance are available at any time. Between selecting a delay period of up to two years and the same range of short- and long-term maturities available on Classic Advances, the Forward Starting Advance can be tailored by a member to align with whatever liquidity and interest-rate risks they would like to address.

In addition to the bullet maturities (Classic Advance) mentioned thus far, the member can also elect to structure the Forward Starting Advance as amortizing and further customize the maturity and amortization schedule. Forward Starting Advances may also be used in tandem with Community Development Advances, enabling members to capture discounted rates through these programs to help support affordable housing in New England.

One strategy that is similar to using Forward Starting Advances is restructuring advances. In an advance restructure, a member takes an existing borrowing and extends its maturity, blending the prepayment fee into the current rate at the new term. 

Like the Forward Starting Advance, incremental borrowing is not being added immediately, and the member can secure the rate and the funding for some period into the future. The difference with restructuring an advance is that it immediately provides support to cost of funds, as the rate being paid on the existing borrowing is reduced.

The example below shows how a member might utilize an advance restructure or execute a Forward Starting Advance to replace the maturity of an existing advance.

For an advance with a coupon of 2.20% and 12 months to maturity, the member could restructure to a new three-year term at a rate of 1.40%, for immediate savings of 80 basis points. Alternatively, they could elect to use a one-year delay, two-year maturity Forward Starting Advance at 0.79%, which would replace the maturity of the existing 2.20% advance in 12 months.

Recent market conditions have created challenges and opportunities for FHLBank Boston members. Our Financial Strategies group has developed a suite of analytical tools designed to help you identify the funding solutions that best fit the unique needs of your balance sheet. Please contact me at 617-292-9644 or andrew.paolillo@fhlbboston.com, or your relationship manager for more details.

FHLBank Boston does not act as a financial advisor, and members should independently evaluate the suitability and risks of all advances.