Driving Our Mission Through Liquidity: How the Counterparty Credit Team Helps Safeguard Ready Access to Low-Cost Funding

by Bryan L. Brinkley, Managing Director, Counterparty and Non-Depository Member Credit, and Fanny Yung, Associate Director, Counterparty Credit

The Federal Home Loan Bank San Francisco’s (“Bank’s”) mission is to be a reliable provider of low-cost liquidity for our member institutions daily, in all economic cycles. To meet member demand for advances throughout the operating day, the Bank’s Capital Markets & Analysis (“CMA”) team is responsible for maintaining and managing a pool of liquid investments. To ensure that funds remain available throughout the business day, CMA invests the Bank’s liquidity in federal funds sold, reverse repurchase agreements, and U.S. Treasuries.

The Bank’s reliance on the liquidity portfolio to support member advance demand depends on the performance of counterparties who: (1) buy federal funds from the Bank, (2) enter into reverse repurchase agreements with the Bank, and/or (3) execute purchase and sale orders for U.S. Treasuries for the Bank. The Bank’s Counterparty Credit team within the Credit Department works closely with CMA to minimize the possibility of repayment or securities delivery failures, or in other words counterparty credit risk, within this portfolio.

A Balancing Act: Safeguarding Liquidity and Meeting Evolving Needs

The Counterparty Credit team works with CMA to meet evolving business needs while safeguarding the Bank’s liquid investments from credit risk. To support CMA, Counterparty Credit focuses on: 

  • Providing credit insight on new business opportunities while collaborating closely with other teams such as Legal and Portfolio Accounting & Analysis;
  • Assessing new counterparty requests, preparing the related credit proposals, and obtaining necessary approvals; and
  • Continuously surveilling the approved counterparty portfolio, which consists of roughly six primary counterparty peer banking groups and their subsidiaries, organized by geographies (APAC, Canadian, Major European Banks, Nordics, US G-SIBs, and US Regionals), and broker-dealers. This represents over 60 financial groups and individual financial institutions.

Counterparty Credit works closely with CMA and other business support functions to evaluate and design new investment ideas and initiatives. For instance, Counterparty Credit took the lead in designing and building upon the Bank’s Diverse Broker Dealer Program in recent years to provide a low-risk, cost-effective contribution to meet the Bank’s Diversity and Inclusion commitment through eligible securities purchases and sales. In other words, we leverage the pool of Office of Finance approved diverse broker-dealers to help meet our business needs and fulfill the Bank’s Diversity and Inclusion objectives in an impactful way.

As financial market conditions and participants change, the need for new counterparties arises. Counterparty Credit handles all new counterparty requests from CMA ranging from: (1) initial business case testing, through (2) eligibility checking, (3) credit analysis, and (4) final approval by the Bank’s Credit Committee, Chief Credit Officer, or another authorized officer depending upon the type of approval required. An interesting example comes from August 2019 when CMA and Counterparty Credit sought and received Credit Committee approval for Fixed Income Clearing Corporation via a Sponsored Repo Program that enables the Bank to transact overnight Treasury repo with this central repo clearinghouse.

Continuous counterparty surveillance is the most key aspect of our team’s approach to protecting the Bank’s liquid assets. Counterparty Credit monitors key external and market-driven credit indicators, including credit default swap spreads, equity price changes, major rating agency ratings, and Bloomberg-modeled default probabilities. Some of these indicators have alert trigger levels that, when breached, cause the Bank to take a cautious approach to trading with the related counterparty until a review is conducted by Counterparty Credit. The team also monitors news trends from the financial press and credit research providers, in addition to the major rating agencies, on an on-going basis.

A Culture of Safety and Soundness Through Robust Governance

Counterparty Credit supports and advocates for CMA’s business needs in the context of the Bank’s robust corporate governance frameworks, conservative risk appetite, and regulatory oversight. To help ensure that funds are readily available to disburse to members while the credit quality of the Bank’s liquidity portfolio meets the Bank’s conservative risk appetite, Counterparty Credit interacts closely with teams providing risk management and governance oversight. These teams include Credit & Collateral Risk Management, Enterprise Risk Management, Internal Audit, and SOX Compliance.

Over 60 Years of Credit, Compliance, and Audit Experience

The Counterparty Credit team is made up of Bryan Brinkley, Fanny Yung, and Shirley Bai. Together, we have accumulated almost 60 years of professional experience across credit, compliance, and audit areas. Bryan has over 30 years of experience in counterparty risk and investment grade credit investment management. He previously worked in AXA Group for almost six years in Tokyo and Paris, and over 16 years at the European Bank for Reconstruction and Development, a supranational organization in London. Fanny has 20 years of experience in counterparty and wholesale secured lending (members) credit analysis in addition to credit compliance. Shirley also has broad experience in counterparty credit, internal audit, and process innovation totaling nearly 10 years. Shirley allocates her time between counterparty credit responsibilities and business project management of Moody’s CreditLens, a major new credit underwriting and monitoring platform currently being implemented at the Bank.