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Off-Balance-
Sheet
Instruments
Federal Home Loan Bank of Seattle Letters of Credit are an efficient and low-cost way for our financial institution customers to secure their contractual agreements and guarantee to a third party that they have the financial strength to perform as agreed in a contract.
Letters of Credit may be used to:
- facilitate the purchase of (or commitment to purchase) mortgage loans.
- collateralize public deposits and interest rate swaps.
- support the issuance of medium-term notes and housing-related tax-exempt financing.
- support other transactions that promote housing activity, including Community Investment Program (CIP) and Community Reinvestment Act (CRA) projects.
A Letter of Credit backed by the Seattle Banks Aaa credit rating may help lower the cost of the transaction it is supporting. Our Letters of Credit are very competitively priced and are available at a discount when supporting projects that qualify under the CIP. Issued for up to 20 years for interest rate swaps and up to 10 years for housing finance, Letters of Credit can be structured to meet the specific needs of the customer.
An interest rate swap is a financial management tool used to change the repricing characteristics of an asset or a liability or to reduce rate mismatches in an asset or liability. It can also be used to alter the overall interest sensitivity in an institutions balance sheet.
In an interest rate swap transaction, parties agree to swap interest payment streams without any actual exchange of principal. No new money is raised nor does any principal change hands. Parties agree to swap interest payment streams on the notional principal -- the amount on which the interest payments are computed.
A swap is an excellent tool for converting floating-rate interest into fixed-rate and vice versa. It can also be used to exchange variable rates tied to different indices. Interest rate swaps also allow institutions to shorten or lengthen maturities without adding to or restructuring their balance sheets.
Unlike Wall Street, the Seattle Banks Interest Rate Swap program does not require high dollar-amount minimums or additional collateral pledging agreements.
Interest Rate Caps, Collars and Floors
Financial institutions can use interest rate caps, collars and/or floors to manage their interest rate risk. The customer pays a fee to the Seattle Bank which agrees to reimburse the customer if interest rates rise above a predetermined level (the cap rate) or fall below a predetermined level (the floor rate). The Seattle Bank pays the customer the difference between the current rate and the cap or floor rate. With a collar, the customer purchases both a cap and a floor and the Seattle Bank pays the customer if rates move outside either parameter. The interest rate generally used in a cap, collar or floor agreement is the three-month LIBOR rate, but other indices may be requested. Caps, collars and floors are available in terms from two to seven years.