Moody's Investors Service affirmed the Aaa long-term senior debt and Prime-1 short-term debt ratings of the Federal Home Loan Bank System (FHLBank System) following the announcement that the FHLBanks of Des Moines and Seattle have entered into an exclusivity arrangement regarding a potential merger. Moody's also affirmed the Aaa long-term bank deposit and Prime-1 short-term debt ratings of Federal Home Loan Banks of Des Moines and Seattle (FHLBank of Des Moines and FHLBank of Seattle). The outlook for all ratings is stable.
The affirmations follow the 31 July 2014 announcement that the FHLBanks of Des Moines and Seattle have entered into an exclusivity arrangement regarding a potential merger of the two FHLBanks. A combined FHLBank of Des Moines and Seattle would be the largest FHLBank by number of members and 4th largest by advances; currently Des Moines is tied for 5th largest and Seattle is by far the smallest based on advances.
A merger would expand these FHLBank's geographic footprint, providing opportunities to grow as well as reduce expenses over time. The benefits are most tangible for the FHLBank of Seattle whose advance business has underperformed for quite some time. In addition, a merger would end the significant regulatory oversight of the FHLBank of Seattle that has persisted for several years. However, the potential merger will expose both FHLBanks to execution risk associated with integrating the two FHLBanks, something that has never been done in the 80 year history of the FHLBank System, as well as the transition of key personnel and management systems.
The affirmation of the FHLBank System reflects the fact that the merger doesn't materially change the overall credit profile of the FHLBank System. The merger would be credit positive for the system because it would eliminate the weakest bank in the system.
The principal methodology used in these ratings was Global Banks published in July 2014. Other methodologies used include the Government-Related Issuers methodology published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
The FHLBanks of Des Moines and Seattle are two of the twelve FHLBanks that comprise the FHLBank System. The FHLBanks' primary business is extending "secured advances" (i.e., loans) to members banks, which the members use to finance mortgages held in their portfolios. Total assets of the FHLBank of Des Moines, FHLBank of Seattle and the FHLBank System was $73, billion, $36 billion, and $820 billion, respectively as of 31 March 2014.