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 in providing these insurers with an effective liquidity backstop during the financial crisis, the FHLB`s advances have become, in the meantime, for many life insurers a more widespread source of advance financing.8 A financing contract is an investment vehicle in which a person pays a lump sum to the seller in exchange for a fixed return. Financing agreements are generally considered low risk and are therefore often acquired by pension funds, investment funds and other similar companies. What are securities guaranteed by a financing contract? A financing contract is a deposit contract sold by life insurance companies, which generally pays a guaranteed rate of return over a specified period of time. As the name suggests, these insurance contracts are similar to deposits because they do not contain mortality or morbidity quotas. Insurers make money by issuing these contracts and investing the product in relatively more profitable assets. Financing agreements have long been allocated directly to municipalities and institutional investors, but in recent years insurance companies have begun to create securitization companies (SPEs) to establish financing agreements and issue financing agreements on guaranteed securities (FABS). Based on a super senior debt on the insurer`s balance sheet, FABS attracts a number of potential investors and allows insurers to borrow at a lower cost than other debt securities.18 The movement of life insurers to FHLB is in line with a wider transfer of financing from the parallel bank to the FHLB system. See Acharya, Afonso and Kovner (2013). Back to the text The FABS market collapsed during the financial crisis, when institutional investors withdrew from the structured product markets6. FABS emissions have recovered somewhat since then, and our latest estimates indicate that FABS unpaid debts reached about $75 billion in 2016:Q1. 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. A financing agreement is a type of investment that some institutional investors use because of the instrument`s low-risk and fixed-rate characteristics.