Insurance Companies and the Federal Home Loan Bank of New York: A Sensible Proposal

Legislation has been introduced in the New York State Assembly (Bill 8040) that will significantly increase funding opportunities for insurance company members of the Federal Home Loan Bank of New York (“FHLBNY”).  Under the proposed bill, which is already law in 19 states, provisions of the insurance insolvency law will be amended to clarify the rights of the FHLBNY in cases of insurance company insolvencies.

The FHLBNY is a Congressionally chartered, wholesale bank. It is part of the Federal Home Loan Bank System, a national wholesale banking network of 11 regional, stockholder-owned banks. As of September 30, 2019, the FHLBNY serves 327 financial institutions – including insurance companies, banks, credit unions and community development financial institutions – in New Jersey, New York, Puerto Rico, and the U.S. Virgin Islands.  The FHLBNY plays an instrumental role in supporting the growth and stability of its insurance company members.  By providing reliable, low-cost funding on a fully secured basis, the FHLBNY helps its insurance company members become stronger business entities, meet financial challenges to protect their policyholders, and promote housing finance and economic growth in their communities.

Under federal insolvency law for banks and credit unions, the Federal Home Loan Banks are granted a specific exemption to promptly access and liquidate pledged collateral.  By contrast, insurance company insolvencies are governed by state law.  As a result, the FHLBNY faces greater risk when lending to insurance companies domiciled in New York and New Jersey – two states which do not have an exemption similar to federal insolvency law for insurance companies.  The legislation introduced in New York addresses this disparity between federal banking and state insurance insolvency laws.  As noted, 19 states have already enacted similar amendments, which ensure that the insurance company industry and state insurance company regulators are fully prepared to rely on the Federal Home Loan Banks in times of financial stress.

In addition to providing legal certainty regarding the FHLBNY’s secured party rights, the proposed legislation would result in greater protections for policyholders, strengthen the partnership between regulators, receivers and the FHLBNY to support troubled insurance companies, and improve lending terms for insurance company members of the FHLBNY. We wholly endorse it. SA