A Look at ‘Normal’

FHLBank profits for 2023 were two times higher than any previous year, and 2024 may reach that level too.  I’ve shown the FHLBs have abundant resources to support affordable housing initiatives – indeed much more than they currently do, but further explanation is still required.  2023 and 2024 profits may not be repeatable over time, so in a more normal environment, what can we expect the size of the pie to be?

I focus on 2019. Surprising but at the same time not surprising, of the past 18 years, since 2006, there has only been one ‘normal’ year for bankers and the FHLBs. In 2019 there was no housing bubble, no housing crash, no investment portfolio losses, no monetary policy with very low interest rates, no lawsuit settlements, no COVID, no efforts to combat inflation with higher interest rates and no liquidity crisis.  2019 it is.

Based on work done earlier and referenced below, the Banks earned $3.2 billion and paid out dividends of $2.1 billion – adding $1.1 billion to Retained Earnings (which compares to $6.7 billion, $3.4 billion and $3.3 billion respectively for 2023). 

Income$3.2 billion$6.7 billion
Dividends$2.1 billion$3.4 billion
Retained Earnings Increase+$1.1 billion$+3.3 billion
Comparison 2019 to 2023

Moreover, advance balances for 2019 were about $700 billion (a typical 60% of assets), and short-term interest rates were just over 2% as the Fed was neither providing monetary support to the economy nor combating inflationary pressures.  All in all, a ‘normal’ year.

In 2019 estimated income came from Advances was (40%), Mortgage Loans (8%), MBS investments (22%) and investments of equity (27%).  Importantly the biggest difference relative to 2023 is much lower income on short term investments due to lower Fed Funds rates.

Continuing a look at ‘normal’– 2019, the Banks’ Return on Equity (Capital Stock plus Retained Earnings) was 5.6% (3.5% over Fed Funds) and Return on Capital Stock as paid in Dividends was 5.8% (3.6% over Fed Funds).

This somewhat detailed and number-based ‘level setting’ is important, if tedious.  2023 was not normal, rather 2019 when earnings were roughly half of 2023, dividends a little more than half and additions to retained earnings a little less than half are more normal.  This does not mean those numbers are desired, but they, not 2023 numbers are relevant for discussion of ‘available funds’ as I set out to do.  

Up next week – are the dividend rate and additions to retained earnings appropriate?

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