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By
Paul Webber
The Federal Home Loan Bank of Boston (the Bank) recently introduced
the Slider advance, a new LIBOR floating-rate, fixed-term advance
with a declining interest-rate participation.
The declining-rate feature is based on an embedded interest-rate
floor. As rates fall, the floating-rate advance adjusts downward.
Once rates decline below a member-specified strike rate, the advance
rate is further reduced – but at an accelerated pace. This
feature offers members added protection against net interest margin
compression in a falling-rate environment.
The Slider advance will assist members holding long-term adjustable-rate
assets funded with a combination of advances and deposits (for example,
HELOCs). The declining interest-rate feature protects members against
margin compression associated with a decrease in short-term interest
rates and a decline in yields on assets as deposit costs “floor
out.”
Unlike deposit funding, the Slider’s rate will continue to
decrease as LIBOR declines below the strike rate, though at a two-to-one
pace. When LIBOR reaches the designated strike rate, the advance
rate will decline two basis points for every one-basis-point decline
in LIBOR. Third-party asset/liability advisors are recommending the
use of this type of funding as protection against falling rates.
The Slider is the newest example of the Bank’s “option-embedded” products
designed to help members participate in interest-rate rallies and
manage the interest-rate risk in their balance sheets. The Bank also
offers a capped floating-rate advance and a collared advance. It
is currently developing an advance with an embedded corridor feature.
All of these products are indexed to either one- or three-month LIBOR.
The premium cost for the embedded option feature is included in the
advance rate on an annualized basis.
Additional information about the Slider advance (link) is available
on the Slider
product page. This newest Bank
advance product provides members with a unique alternative to manage
interest-rate risk. (See related
article in
this issue of Solutions.)
Please call the Money Desk at 1-800-357-3452 or moneydesk@fhlbboston.com
to let them know your funding requirements.
Paul Webber is first vice president /member funding services
at the Federal Home Loan Bank of Boston.
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