Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

With 34 of 50 private real estate developers in China seeing delinquencies, the remaining 16 facing $1.6 billion in bond payments this month and another $3 billion in January 2024. It is an opportune time to bring back the FHLB chart. Get a heat check on the US banking health.

Tier 1 Alpha: Bank Borrowing Spike Raising Caution Flags - 9.6.23MSR

Today's bonus chart highlights the increasingly critical role of the Federal Home Loan Bank (FHLB). Created by Congress in 1932 to funnel affordable, long-term funding to community banks for mortgages, the FHLB has become much more. It's like the financial "bank of mom and dad" for banks of all sizes, a dependable source of liquidity. FHLB is a lender of second resort. As banks confront liquidity challenges, they have several options ranging from quick solutions like the repo market to more substantial backing from the FHLB, each resembling different lifelines, much like a college student strapped for rent. And don't forget the "last resort" options like the Fed discount window, where failing to secure funding can mean the end of your bank.

The FHLB's changing role and explosive growth, especially compared to 2007, is raising eyebrows (that's putting it politely). During the 2007 financial crisis, it acted as an unsung hero, providing crucial liquidity until it couldn't meet the overwhelming demand, leading banks to the Fed's costly discount window. Fast-forward to 2023, FHLB lending has gone parabolic, surpassing 2007 levels and attracting high-profile clients like Signature Bank and Ally Bank. While this could signal banks' increased liquidity needs for mortgages, the overall slowing of lending raises questions. Is this borrowing spike a red flag? For confirmation, attention is shifting to alternative liquidity sources; if we start to see explosive borrowing at the Fed's discount window, then we have an awkward discussion, and while it's not time to hit the panic button, the caution flags are waving.

Learn more about the Market Situation Report written by Tier 1 Alpha.