The Federal Housing Finance Agency confirmed that Federal Home Loan Banks may accept PPP loans as collateral when making advances to their member banks. This move—the latest in a series of actions by the FHFA to support lending during the pandemic—is intended to provide additional liquidity for small banks they work to meet the needs of small businesses in their communities.
While a positive development, there are limitations of the usefulness of this action, due to a haircut of at least 10% taken by the FHLBs that will reduce the overall value of collateral, as noted in a list of conditions released by FHFA. Additionally, members pledging collateral must have a CAMELS rating of 3 or better or a member credit ranking in the top 60% of FHLB’s member rating systems. FHLB member banks may pledge a maximum of $5 billion in PPP loans in collateral to their FHLB.