How It Works: Routine Test Borrowing

Hi, my name is Tyler Buckridge with the Federal Home Loan Bank of Boston, and thanks for taking a few minutes to walk through what we call routine test borrowing.

Basically, a monthly or quarterly fire drill for your FHLBank line.

After March 2023, many started drawing a sharper line between reported liquidity and accessible liquidity.

On paper, you may have a very healthy FHLBank borrowing capacity number.

What really matters in a liquidity crunch is Can you actually take down that line fast?

Do your people know the steps without hunting for a procedure? And can you show examiners in your board you’ve proven it works?

That’s what this short case study is about. I’ll keep it to about 10 minutes and cover three things.

Why meaningful test borrowing is worth your time.

A simple three-stage playbook you can repeat monthly, quarterly, or at least annually.

And a quick online banking walkthrough so you can see how easy it is to run the test.

So, why bother test borrowing when things feel calm?

First, regulatory credibility.

Supervisors increasingly want evidence that contingent liquidity is real.

It’s a much stronger story to say, we took down an FHLBank advance in October, here’s the size, here are the timestamps, and here’s how long it took funds to hit the Fed account.

That turns an assumption into an actual operational test.

Second, operational muscle memory.

The middle of a liquidity event is a terrible time to find out that your Fedwire template has an old routing number or that your backup user’s password expired.

Regular test borrows make the process routine, so in a real crunch, your team is repeating something they did last month, not learning from scratch.

We especially like test borrows that happen when your primary funding person is on vacation.

If Jane usually takes down the advances, schedule the test borrowing when Jane’s at the beach.

Can the backup log in, call, wire, and document everything without any drama?

That’s real redundancy. And third, proving meaningful capacity.

A thousand-dollar test on a billion-dollar balance sheet doesn’t really tell you much.

Think in terms of real numbers, maybe a hundred thousand to a million dollars for a routine test, and occasionally something much larger, close to your available line prove that cash and collateral can move at scale.

And just to head off the usual question, what does this cost me? Well, we’ve run the numbers for you.

On a one-week Classic Advance test of a million dollars at 4.18%, if you park the proceeds at the IORB and factor in the dividend on the required activity stock purchase, the net cost is negative.

You actually pick up a couple of bucks over the course of a week.

So, say you exclude the IORB interest from the equation and do a two-day test borrowing at $100,000. Well, it’ll cost you about $20. That’s one Andrew Jackson.

So the cost is not a meaningful barrier here.

We’ve broken down the process into three simple stages that you can repeat every time you test. Stage one is pre-borrow setup.

Think pre-draw or t-minus one. This is your quick checklist, the day before or the morning of the test.

The first step is to decide who’s going to take down the advance, who the backup will be, and then to make both those people have the proper authorities for online and call-in advances.

Then you’re going to decide the amount in terms, maybe a million dollars for a week.

Keep in mind that for a one-week Classic Advance and longer, you can do this online, but for a two to four day classic, you do need to call into the desk. Then you’re going to check your collateral headroom.

If the discounted collateral value is close to your planned borrowing, that’s your cue to pledge more loans or allocate securities from your Fed or Custodian account to the FHLBank Boston.

And then finally, pull up the test borrowing procedure and one-page reporting template that we’ve posted with this video in the deck, so you’re ready to log request times, funding times, and any issues that may arise. Stage two is execution.

This is draw day or day two. You actually take down the advance and move the cash.

For a real test, you don’t just leave the money sitting in ideal way.

You wire it out to the Fed or correspondent account and then back again at maturity. That’s how you prove that the plumbing works end to end.

Then stage three is payoff, reconcile, and document.

This is maturity and after or t plus five or six for a one-week borrowing.

You wire the funds back, confirm the payoff and the related capital stock entries, reconcile the reports, and then file that reporting template with your ALCO materials.

If you follow these three stages a few times a year, you build a track record that your examiners, your board, and frankly, you can feel good about.

Let’s take a look at how this actually feels in online banking.

Step one, open a new advance.

From the left-hand menu, click advances and then create a new advance.

That’s your starting point, whether you’re borrowing for real or just running a drill.

Step two is select a type and term.

On the rate screen, you’ll see the short-term classic menu.

For a routine test, the easiest option is the one-week classic.

It’s visible right on the screen, and it keeps things simple, but if you did wanna do a two, three, or four-day classic, those rates aren’t listed here, but just call into the desk. We’ll quote it for you and book it.

And it’s actually a great reason to practice a call-in advance in case your internet ever goes down when you have a real borrowing need.

Step three is review terms and pick your disbursement date.

Confirm the advance type, the rate, and the term, and then select the disbursement date, often today for a test. And then step four is enter the advance amount.

As we discussed, use a practical test size, somewhere in that hundred thousand to a million dollar range for a normal routine drill, and then hire when you want to prove full capacity. That’s all you need to set up the test.

The next slide is about wiring the funds out so that we make sure it’s a real test.

Once you’ve set up the advance, there are three quick steps to turn it into a full test.

Step five, set up the wire out, choose yes for wire out, key in the wire amount, usually the full advance, and then select your fed or correspondent wire template.

And here you can confirm that your ISO 222 FebWIRE templates, limits, and approvals are all set up the way that you expect.

Step 6.

Review and Submit.

On the Advance Preview screen, double-check the type, term, rate, and the disbursement account and the WIRE details.

Before you hit Submit, you’ll also see the estimated activity-based capital stock purchase appear right below where it says, ” This rate is available for 60 seconds.

That’s a helpful part of the test because it shows you the full operational picture, advance amount plus any stock purchase requirement, all before you hit submit.

Then, when ready, hit submit and note the time.

On your reporting template, jot down the request timestamp and then when the funds hit your Fed account.

Step seven, confirm funding and status.

Use the view advance list to see the new advance showing as dispersed and then click the down for the full advance details, or save the confirmation to your test file.

Then after disbursement, keep an eye on the ideal way activity so you see the full set of entries, funding in, the wire out, and the activity-based capital stock debit.

Timing can vary, but that debit usually posts later the same business day around 5.

So confirm was enough in ideal way to cover it, and if needed, wire funds in that day to avoid an overdraft.

At this point, you’ve proven something important.

FHLBank Boston can deliver funding to your Fed or correspondent account quickly and cleanly using the same channels you’ll rely on in a stressed week.

For most members, this is materially faster and simpler than lining up brokered CDs or working through the discount window.

The last step is closing the loop and capturing what you learned.

At maturity, wire the funds back from your Fed or correspondent to Idealway and confirm principle and interest are fully repaid.

If you ran a larger test, you’ll also see how activity-based capital stock moves with the borrowing, and what happens when stock becomes excess after payoff. Here’s the practical rule of thumb.

On a daily basis, the bank calculates excess stock above the lesser of 1, 3% of your total investment requirement, or 2, 3 million dollars.

If your excess stock exceeds that lesser amount by $100,000 or more, the bank generally repurchases enough at the beginning of the next business day to bring you back down to that lesser threshold.

So if an advance matures on Monday, the excess stock repurchase would typically post on Tuesday.

Smaller excess balances below 100,000 are typically handled through the annual repurchase cycle, and that’s in April.

Next, review your reports and notifications.

Check online banking, ideal way statements, wire reports, and make sure that dates, amounts, and counterparties all line up.

This is a good time to clean out any outdated templates or approval limits that surface during the test and then the test borrowing report.

Use the template including who initiated, who approved, timestamps for the request, funding and payoff, what went smoothly, what didn’t, and any follow-ups like add more collateral, update user permissions, or raise internal wire limits.

And then finally share the results with ALCO and management.

Drop that one-page report and the confirmations into your liquidity documentation and then reference it in ALCO minutes.

That way, when examiners ask, you’re not saying, ” Well, we could use our FHLBank line, now you’re saying, ” We do use it, here’s the evidence, and here’s how quickly funds arrived.

If you repeat that cycle at least once a year, and ideally quarterly or even monthly, it becomes a very natural fire drill that keeps your team sharp in your liquidity story, much stronger. All right, I’ll stop there.

The big idea is simple. Don’t wait for stress to find out whether your liquidity works.

Prove it now when the stakes are low, and then capture that proof for your examiners, for you, and for your own peace of mind.

On the page with this video, you’ll find a test borrowing procedure that you can adapt to your institution, as well as a reporting template to log each drill.

And if you’d like help designing a test plan or reviewing your collateral capacity, or if you just want someone on the phone the first time you run through this, please reach out to any of us relationship managers on this slide or call 800-357-3452 and ask for the funding desk.

Thanks for watching, and thank you for letting FHLBank Boston be part of your liquidity toolkit.