Originally published as "Federal Home Loan Bank President Has Cause to Advance" on July 15, 2002, in Banker & Tradesman. Reprinted with permission.

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By Michelle Forcier Anderson As a key resource in the financial services industry, the Federal Home Loan Bank of Boston is relied upon in good times and bad when lenders need more money. The Federal Home Loan Bank has 12 regional offices throughout the country and uses private-sector capital to fund member financial institutions with liquidity and wholesale loans. Its mission is to enhance the availability of credit for housing and economic growth.

Bull and bear markets both have contributed to the FHLB's success as an entity. When the economy is humming, deposits pour out of banks and into the stock market for higher returns. During such a period of decreasing deposits, banks increasingly have come to rely on the FHLB as a source of capital. When the tech wrecks of the new millennium began, followed by plunging stock values and recession, deposits began to trickle back in. But during a boom period, lending activity increases, and again the services of the FHLB help lending institutions meet demand.

For the past 13 years Michael A. Jessee has served as the president and chief executive officer of the FHLB Boston. During his tenure, the bank has grown 264 percent to $40 billion in assets. That's not a surprising achievement for a man who went from being an economist at the Federal Reserve Bank of New York and the Bank of Virginia to the chief operating officer at the FHLB San Francisco before coming to the Hub.

"Since the really terrible recession of 1990-1992 things have bounced back nicely in the real estate market and [that] drives our balance sheet," said Jessee. "So we've been lending a lot of money — up until recently, that is. Our growth has slowed in the last year or two," he said. During the 1990s, Jessee said the bank's advances portfolio grew at 20 to 25 percent a year.

Advances for 2001 were flat at $23.7 billion on a daily average basis.

Jessee's training as an economist helps him weather the tides of the green sea. The latest economic recovery has already begun and will continue to build slowly for some time. Eventually, the Federal Reserve will begin to raise interest rates. "But I don't see them rising rapidly — more of a modest growth. Just like the recession was mild, I think the recovery will be mild," Jessee said.

Contingency Planning
While the FHLB is used to riding the financial market seesaw, no one had anticipated the cataclysmic events of Sept. 11. The cost in human terms was devastating but, surprisingly, the terrorist attacks had little long-term effect on the operations of the U.S. financial markets, Jessee said.

"It was certainly a crisis in a short period of time, when you have the entire bond market collapsing and not operating. For days we could not go into the bond markets where we raise the bulk of our money," said Jessee of the period immediately following the attacks. Liquidity dried up very quickly but within five days the Federal Home Loan Bank system was able to go back into the bond market through new trading desks quickly established by New York dealers.

"The banking system, including the Federal Home Loan Banks and the Federal Reserve Banks, operated in just a miraculous way," said Jessee.

The FHLB Boston was fortunate on several fronts, including that it had stocked up enough liquidity to loan money to its member banks and to lend to other FHLB regions when necessary, he said.

From the tragedy the industry learned important lessons, including that you cannot plan for all disasters and that a disaster recovery site should be located far from the primary site. Jessee said the FHLB New York backup site was in Jersey City, N.J., which had to be evacuated. Although the FHLB Boston wasn't evacuated, its Westborough backup site was activated following Sept. 11.

"We learned a lot about how to deal with a total disaster which we had never anticipated. All the Home Loan Banks have reevaluated their contingency plans," said Jessee. As part of that re-evaluation, technology was upgraded at the Westborough site to ensure "it's as easily operable as the main headquarters is in Boston," he said.

That lesson learned, Jessee is looking toward future growth.

Massachusetts and the rest of New England are mature bank markets, and that means most area banks already are members of the FHLB. In order to grow, Jessee said the bank will look to offering more products, like the recently introduced Mortgage Partnership Finance vehicle.

The FHLB's affordable housing programs garner a great deal of attention, as they should, said Jessee, but the bank also serves a higher purpose.

"We get a lot of good publicity for our affordable housing efforts and we should get that type of attention, but to me, our core business of providing liquidity and long-term advances [to lenders] is really where we add a lot of value," he said. "It's not the stuff of headlines and newspapers, perhaps, but our day-in, day-out core lending business adds a lot of value to the community banks in New England and, frankly, allows us to support affordable housing as well."