A financing agreement is a type of investment that some institutional investors use because of the instrument`s low-risk and fixed-rate characteristics. The term generally refers to an agreement between two parties, with the issuer offering the investor a return on a lump sum investment. Generally speaking, two parties can enter into a legally binding financing agreement and the terms will generally determine the expected use of the capital and the expected return to the investor over time. This note describes the new data on securities covered by a financing contract (FABS) that are provided under the Enhanced Financial Accounts (EFA) initiative. As described in Holmquist and Perozek (2016), the U.S. financial accounts report the total amount of FABS`s outstanding assets at a quarterly rate. This EFA project expands financial account data by providing daily data to different types of FABS, which vary depending on duration and integrated optionality. The more detailed data presented in this EFA project provide a clearer picture of developments in this important financing market, including the start-up of a segment of the FABS market from the summer of 2007 (Foley-Fisher, Narajabad and Verani 2015). The project thus promotes the objectives of the EFA initiative – described in Gallin and Smith (2014) – in order to provide a more detailed and frequent picture of financial intermediation in the United States. Life insurers reacted to the collapse of the fabs market by issuing FABN in the shorter term, As shown in Figure 3, and FABCP , Figure 5, as well as by the direct allocation of financing agreements to the Federal Home Loan Banks (FHLB).7 As in the case of FABS, insurers earn a spread by investing the proceeds of financing agreements placed with FHLb in a portfolio of real estate and non-real estate assets with a higher return on the higher than financing costs.
As shown in Chart 7, the increase in FHLB`s advances during the financial crisis is broadly equivalent to that of the outstanding FABS. While FHLB played a particular role during the financial crisis in providing these insurers with an effective liquidity backstop, FHLB`s advances have since become a more widespread source of wholesale financing for many life insurers.81 Another advantage is that financing agreements do not increase the leverage of insurers, since they are legal insurance contracts. Back to the Text In a typical FABS structure, a life insurer sells a single financing agreement to an EPS that funds the financing agreement by distributing smaller FABS parts to institutional investors. In addition, at least two types of FABS are designed for short-term investors, such as leading money market investment funds: Extendible Funding Agreement-backed Notes (XFABN) and Funding Agreement-backed commercial paper (FABCP). These securities have a much shorter term than the underlying financing agreement, which typically has a term of about ten years. XFABN often has an initial duration of 397 days, but each month gives investors the option to gradually extend the duration of their bonds by one month. FABCP is a one-week to six-month fixed-term contract.3 FABS in U.S. Financial Accounts Aggregated quarterly values for FABS issues related to U.S.
life insurers are available in U.S. financial accounts starting in 1997:Q3. For more information on how FABS are recorded in financial accounts, see Holmquist and Perozek (2016). To keep up with the FABS market, 4 The fabs market collapsed during the financial crisis, when institutional investors withdrew from the structured product markets.6 After the initial sharp decline in the early years of the financial crisis, fabS outstanding continued to decline, but more slowly, until the end of 2013, when the fabs level fell to about $60 billion , or just over a third of the outstanding amount in 2008.