What Is Federal Home Loan Bank?
A Federal Home Loan Bank (FHLBank) is one of 11 government-sponsored enterprises (GSEs) that provide liquidity and funding to member financial institutions in the United States. As part of the broader category of Financial Institutions & Regulation, these wholesale banks serve as a stable and reliable source of funding for their members, which include commercial banks, credit unions, savings institutions, and insurance companies. The primary mission of the Federal Home Loan Bank system is to support residential mortgage loans and community development by offering advances (secured loans) to its members. The FHLBanks are privately capitalized and owned by their member institutions.
History and Origin
The Federal Home Loan Bank System was established by the Federal Home Loan Bank Act, signed into law by President Herbert Hoover on July 22, 1932, during the depths of the Great Depression. The act aimed to reinvigorate a housing market devastated by widespread foreclosures and a lack of available credit. At its inception, the system created a network of independent, regional wholesale banks intended to provide a stable source of funds for thrift institutions to make mortgage loans and encourage homeownership. Initially, membership was primarily for savings and loan institutions and insurance companies. Over the decades, particularly after the savings and loan crisis of the 1980s, Congress expanded membership eligibility to include commercial banks and credit unions. Today, the Federal Housing Finance Agency (FHFA) regulates and supervises the FHLBank System.4
Key Takeaways
- Federal Home Loan Banks are government-sponsored enterprises (GSEs) that provide funding to member financial institutions.
- Their primary mission is to support housing finance and community development through secured loans, known as advances.
- The system was created in 1932 to provide liquidity to the housing market during the Great Depression.
- FHLBanks are privately owned and capitalized by their member institutions, not by taxpayers directly.
- They serve as a source of on-demand funding for members, particularly during periods of financial stress.
Interpreting the Federal Home Loan Bank
The Federal Home Loan Bank system operates as a "bank for banks," rather than directly serving the public. Its significance lies in its role as a provider of wholesale funding to its member institutions. When a member needs cash, it can turn to its district FHLBank for an "advance," which is a collateralized loan. This access to funding helps member institutions manage their balance sheet liquidity, fulfill lending commitments for homeownership, and support community development. The system's ability to raise funds efficiently in the capital markets allows it to offer competitive rates on these advances, which can then be passed on to borrowers in the form of lower mortgage rates or more available credit.
Hypothetical Example
Imagine "Community Bank USA," a regional financial institution, experiences higher-than-expected withdrawals of customer deposits due to seasonal fluctuations or local economic shifts. To meet these demands without disrupting its lending operations or selling off assets at unfavorable prices, Community Bank USA can turn to its regional Federal Home Loan Bank.
- Request for Advance: Community Bank USA applies for an advance from its FHLBank, pledging a portion of its mortgage portfolio as collateral.
- Funding Disbursement: The FHLBank, having raised funds by issuing debt securities in the capital markets, provides the requested cash advance to Community Bank USA.
- Liquidity Support: Community Bank USA uses these funds to cover the deposit outflows and maintain its operations, including continuing to originate new mortgage loans for local homebuyers. This allows the bank to manage its short-term cash flow without having to significantly alter its core business or impact its customers. The FHLBank's role here is crucial in maintaining stability and ensuring continuous credit flow in the community.
Practical Applications
The Federal Home Loan Bank system plays a vital role in the U.S. financial system, primarily through its provision of liquidity to member institutions. This liquidity enables banks and other members to continue lending for housing and economic development even during periods of market stress. For instance, during the banking turmoil in spring 2023, several banks, including Silicon Valley Bank and Signature Bank, significantly increased their borrowings from their respective Federal Home Loan Banks to manage deposit outflows. This highlighted the FHLBanks' importance as a rapid and substantial source of funding, often serving as a primary recourse before institutions might turn to the Federal Reserve.3 Beyond providing emergency funding, FHLBanks also support affordable housing initiatives through their Affordable Housing Program (AHP), to which they are legally required to contribute a percentage of their net income.2
Limitations and Criticisms
Despite their critical role in providing liquidity, Federal Home Loan Banks face certain limitations and criticisms. A significant point of contention revolves around their status as a government-sponsored enterprise (GSE). This status provides them with an implied government guarantee on their debt, which allows them to borrow at lower interest rates than private entities. Critics argue that this subsidy provides an unfair competitive advantage to their members and that the FHLBanks have, at times, strayed from their core housing mission by focusing on maximizing profits and dividends rather than directing their resources primarily towards affordable housing and community development.1 Concerns have also been raised regarding the system's reliance on large, highly-rated members and its potential role in exacerbating systemic risk during a financial crisis if these large members were to face distress and simultaneously draw heavily on FHLBank advances.
Federal Home Loan Bank vs. Federal Reserve System
While both the Federal Home Loan Bank (FHLBank) system and the Federal Reserve System are federal entities that provide liquidity to financial institutions, their primary missions and structures differ. The FHLBanks are cooperative wholesale banks, owned by their member financial institutions, and are specifically chartered to support housing finance and community development by providing collateralized advances. They act as a stable funding source for their members. In contrast, the Federal Reserve System is the central banking system of the United States, responsible for conducting national monetary policy, maintaining financial stability, and providing banking services to commercial banks and the U.S. government. While FHLBanks offer funding as part of their business model, the Federal Reserve provides liquidity as a lender of last resort and to implement monetary policy objectives.
FAQs
Q: What is the main purpose of a Federal Home Loan Bank?
A: The main purpose of a Federal Home Loan Bank is to provide a reliable source of liquidity and funding to its member financial institutions, primarily to support residential mortgage lending and community development initiatives.
Q: Who owns the Federal Home Loan Banks?
A: The 11 Federal Home Loan Banks are cooperative institutions privately owned and capitalized by their member financial institutions, such as commercial banks, credit unions, and insurance companies.
Q: How do Federal Home Loan Banks get their funding?
A: Federal Home Loan Banks primarily raise their funds by issuing consolidated obligations (debt securities) in the global capital markets. The implied government guarantee on these obligations allows them to borrow at favorable interest rates.
Q: Are Federal Home Loan Banks considered government agencies?
A: No, while they are government-sponsored enterprises (GSEs) chartered by Congress and subject to federal regulation by the Federal Housing Finance Agency (FHFA), they are not government agencies. They are privately capitalized cooperative institutions.