Case Study: Optimizing Collateral Strategy

Hi, I’m Tyler Buckeridge with FHLBank Boston. In this case study, we’re looking at optimizing collateral strategy.

The simple idea is that collateral is not just a requirement behind an advance. It is part of the liquidity infrastructure of the balance sheet.

Many members have more potential liquidity than their current available FHLBank Boston capacity suggests. The question is whether that potential has been identified, reviewed, positioned, and made usable.

So today we will walk through an illustrative one-billion-dollar member and show how collateral strategy can turn a smaller contingency line into a broader accessible liquidity stack.

The goal is not to borrow for the sake of borrowing. The goal is to create more choices before the decision becomes urgent.

Before we begin, this presentation is for general informational purposes only.

The case study is illustrative. Actual eligibility, valuation, borrowing capacity, funding cost, capital stock requirements, and product fit vary by member and are subject to FHLBank Boston review.

There are three themes in the case study.

First is untapped capacity. A member may already have assets on the balance sheet that could support more usable liquidity.

Second is balancing day-to-day needs with contingent liquidity needs. Those can feel like competing goals, but they do not have to be.

Third is enhancing the overall liquidity profile. The point is not simply to pledge more or use more advances.

The point is to create more funding flexibility, more ALM flexibility, and more ability to compare FHLBank Boston alongside deposits and other funding sources when decisions are being made.

Access is the starting point, but it is not the finish line.

A member may have FHLBank Boston access and still feel constrained if the pledge is small, available capacity is limited, or the line is treated only as emergency dry powder.

In that situation, management may avoid evaluating FHLBank Boston even when it could be a logical funding tool.

The institution may instead lean harder on promotional CDs, short wholesale funding, or other marginal sources that may be more expensive or less flexible.

So the issue is not membership access. The issue is usable, accessible, tested capacity.

That is what changes a line from policy language into a practical funding option.

Here is the illustrative member.

This is a one billion dollar institution with a strong lending franchise: seven hundred sixty million dollars of loans, one hundred fifteen million dollars of securities, eight hundred eighty million dollars of deposits, and twenty million dollars of current FHLBank Boston advances.

This is not a distressed balance sheet. In many ways, that is the point.

The constraint is that current available FHLBank Boston capacity is only thirty-five million dollars. Fed and Borrower-in-Custody readiness is not operationally established or tested. And the management posture on advances is mainly contingency liquidity.

The member has access, but not enough usable capacity to make FHLBank Boston a regular part of the funding conversation.

The first place to look is the balance sheet that already exists.

For many members, the opportunity is not a new asset mix. It is organizing existing assets more deliberately.

Residential mortgages may create an opportunity to refresh the Qualified Collateral Report or evaluate loan-level listing.

CRE and multifamily loans may be eligible after review. HELOCs and home-equity loans are often overlooked.

Securities and cash require a deliberate choice: pledge, hold liquid, or position elsewhere.

Other collateral may be more useful supporting Federal Reserve, Borrower-in-Custody, correspondent, or other secured-line readiness.

The practical work is to identify potential collateral pools, evaluate what may be eligible, and route the liquidity stack intentionally. Put differently, the balance sheet may already have liquidity potential. The question is whether that potential has been turned into usable capacity.

This is where the case study puts dollars around the strategy.

The member begins with thirty-five million dollars of available FHLBank Boston capacity.

In this illustrative bridge, residential mortgage optimization adds sixty million dollars. CRE loan collateral adds fifty-five million. Multifamily adds thirty million. HELOC and home-equity collateral adds twenty million. Cash and securities positioning adds another twenty-five million.

That brings available capacity from thirty-five million dollars to two hundred twenty-five million dollars, or one hundred ninety million dollars of incremental FHLBank Boston capacity.

The exact numbers will vary. Eligibility, valuation, haircuts, documentation, concentration limits, market value, credit category, capital stock, and review all matter.

But the strategic point is clear: the same balance sheet can produce very different liquidity outcomes depending on whether collateral is simply owned, or actually positioned and made usable.

Once that capacity is built, the member can separate active funding from contingency liquidity.

FHLBank Boston capacity can support advances, ALM, letters of credit, and funding flexibility.

At the same time, Fed, Borrower-in-Custody, and other secured lines can remain available as contingency backup.

Cash and unencumbered securities can continue to provide day-one liquidity and liquidity-ratio support.

One quick clarification: MPF is an important FHLBank Boston relationship opportunity, but it is not shown here because MPF volume itself does not require collateral in the same way advances or letters of credit do. So we are keeping this slide focused on the collateral-capacity conversation.

That is the shift. The member is not choosing between using FHLBank Boston and preserving liquidity. With enough accessible capacity, the member can use one part of the stack while preserving the rest.

The liquidity stack starts to have assigned jobs instead of one big label that says, only touch in emergency.

Here is the full liquidity stack before and after the collateral review.

Before the review, the member has one hundred thirty million dollars of accessible liquidity resources.

After optimization, that grows to four hundred twenty million dollars, an increase of two hundred ninety million dollars.

Importantly, this is not just a larger FHLBank Boston line.

FHLBank Boston capacity increases, but the member also establishes Fed and Borrower-in-Custody readiness, maintains other secured lines, and preserves cash and unencumbered securities.

The result is a broader accessible liquidity profile, and FHLBank Boston capacity is now large enough to be evaluated actively instead of being treated as too scarce to use.

This is the core proof point.

A common concern is that if a member uses FHLBank Boston capacity, it is using up dry powder.

In this case study, that is not what happens.

After building the stack, the member can use sixty million dollars of advances and still retain three hundred sixty million dollars of accessible liquidity resources.

Before the review, the member had one hundred thirty million dollars of accessible liquidity.

After the review, and after using sixty million dollars, the member still has nearly three times that amount.

The member is not weaker because it uses some capacity. It is stronger because it built enough capacity to use some and still preserve more options than before.

That is the whole case study in one sentence: capacity can be put to work without turning the rest of the liquidity plan into Swiss cheese.

This is where capacity connects to pricing discipline.

When FHLBank Boston capacity is available, members can compare it against marginal funding instead of defaulting to paying up for rate-sensitive deposits or short wholesale funding.

This connects directly to our earlier Optimizing Funding Costs case study: the sticker rate is not always the full economic cost, especially when marginal funding pulls from existing lower-cost balances or creates other balance-sheet tradeoffs.

Here, the chart shows illustrative annual pretax savings from replacing higher-cost marginal funding at a fifty basis point funding-cost difference.

At twenty-five million dollars, that is about one hundred twenty-five thousand dollars per year. At sixty million dollars, it is about three hundred thousand dollars. At one hundred million dollars, it is about five hundred thousand dollars.

This is not about replacing relationship deposits. Relationship funding is valuable. The point is avoiding uneconomic marginal funding when another liability-side tool may fit more efficiently.

Actual results depend on rates, term, structure, dividends, capital stock, and the member’s alternatives.

Once capacity exists, the question changes.

It is less, can we borrow, and more, what liability structure fits the balance sheet?

FHLBank Boston can help with overnight, short-term, seasonal, and contingency funding.

It can help with duration through term advances, laddering, and maturity matching.

It can help with rate and ALM positioning through fixed, floating, amortizing, and option-based structures.

This also connects with our case study on aligning prepayment risk across the balance sheet. The lesson there was that structure matters because customers, borrowers, and funding sources all carry options.

The point here is not that every tool fits every member. The point is that usable capacity creates choices.

The value is optionality once capacity exists.

The next step is making FHLBank Boston visible when funding decisions are made.

That starts with keeping capacity current: increasing pledge where appropriate, refreshing collateral data, and monitoring available capacity.

Then it means putting FHLBank Boston into the funding comparison.

When marginal deposit costs rise, when loan growth creates funding pressure, when a term or rate-structure decision comes up, FHLBank Boston should be part of the discussion.

Finally, it needs to be repeatable: a Treasury or ALCO cadence, clear operational owners, and periodic capacity refreshes.

The goal is not one transaction. The goal is a repeatable funding framework, so capacity is not rediscovered only during stress — which is usually the least enjoyable time to learn a new process.

This slide summarizes the case study.

The same balance sheet looks very different after collateral is organized and capacity is enhanced.

FHLBank Boston capacity moves from thirty-five million dollars to two hundred twenty-five million dollars.

The accessible liquidity stack grows from one hundred thirty million dollars to four hundred twenty million dollars.

And after sixty million dollars of active use, the member still has three hundred sixty million dollars remaining.

Before the review, the member had a small usable line, an emergency-only posture, and more pressure to pay up for marginal alternatives.

After the review, FHLBank Boston is a standing funding option. The accessible liquidity stack is broader. And management can compare FHLBank Boston alongside deposits and other sources.

A calculator alone would not solve this, because the answer depends on the member’s balance sheet, current pledge, collateral quality, funding alternatives, and actual use case.

The better next step is a collateral strategy review. Start with your relationship manager, me, or our Strategies team. We can help look at the current pledge and available capacity, identify potential collateral pools, and coordinate with our Collateral team from there.

The member does not borrow because it has run out of options. It borrows because it has created options.

Thank you for taking the time to go through this case study.

If this raises questions about your institution’s collateral position, available FHLBank Boston capacity, or where FHLBank Boston could fit into your funding strategy, please reach out to your relationship manager or contact me directly.

We can help start the collateral strategy review, look at the current pledge and available capacity, and coordinate with the right teams from there.