What Is the Federal Home Loan Bank Board?
The Federal Home Loan Bank Board (FHLBB) was a United States government agency established to oversee the Federal Home Loan Banks and regulate the nation's savings and loan industry. As a key entity in financial regulation, the FHLBB played a crucial role in supporting homeownership and stabilizing the housing market, particularly during periods of economic distress. Its functions included providing liquidity to financial institutions engaged in mortgage lending, chartering federal savings and loan associations, and ensuring the solvency of the system through regulatory and supervisory duties.
History and Origin
The Federal Home Loan Bank Board was created by the Federal Home Loan Bank Act, signed into law by President Herbert Hoover on July 22, 1932, amidst the deepening Great Depression.6 The Act aimed to provide a stable source of funds for residential mortgages and prevent foreclosures by establishing a system of Federal Home Loan Banks that could lend to member institutions like savings and loan associations, insurance companies, and banks.,
Initially, the FHLBB governed these regional banks and supervised nationally-chartered thrifts. Over the decades, its responsibilities expanded to include oversight of the Federal Savings and Loan Insurance Corporation (FSLIC), which provided deposit insurance for savings and loan accounts.,5 The FHLBB's role evolved through various reorganizations, including periods under the Federal Loan Agency and the Housing and Home Finance Agency, before being re-established as an independent agency in 1955.4 However, the FHLBB faced significant challenges during the savings and loan crisis of the 1980s, a period marked by widespread insolvencies among thrifts due to risky investments and inadequate regulatory oversight. In response to this crisis, the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 abolished the Federal Home Loan Bank Board, transferring its regulatory functions to new agencies.,3
Key Takeaways
- The Federal Home Loan Bank Board (FHLBB) was a U.S. government agency established in 1932 to regulate savings and loan associations and oversee the Federal Home Loan Bank System.
- Its primary goal was to provide liquidity to financial institutions to support home mortgage lending and stabilize the housing market, particularly during the Great Depression.
- The FHLBB also supervised the Federal Savings and Loan Insurance Corporation (FSLIC), which insured deposits at savings and loan institutions.
- The agency was abolished in 1989 by the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) following the savings and loan crisis.
- Its regulatory responsibilities were largely transferred to the Office of Thrift Supervision (OTS) and the Federal Housing Finance Board (later superseded by the Federal Housing Finance Agency).
Interpreting the Federal Home Loan Bank Board's Role
The Federal Home Loan Bank Board served as a central authority for a specific segment of the financial industry. Its existence highlighted the government's commitment to supporting the housing market, a sector vital for economic development. While it did not directly engage in the calculation of financial metrics for individual loans or institutions, its policies significantly influenced the availability and cost of mortgage credit. The FHLBB's actions, such as setting lending guidelines and supervising the solvency of its member institutions, indirectly impacted how interest rates and other terms were determined for residential mortgages. Its regulatory framework dictated the operational parameters for thrifts, affecting their balance sheets and risk profiles.
Practical Applications
While the Federal Home Loan Bank Board no longer exists, its historical role has practical implications for understanding the evolution of U.S. housing finance and financial regulation. Its creation laid the groundwork for the modern government-sponsored enterprises (GSEs) involved in the secondary mortgage market. The FHLBB's experience also serves as a case study in the challenges of regulatory oversight, particularly when economic conditions change rapidly. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989, which disbanded the FHLBB, dramatically restructured the regulatory landscape for savings institutions and is still referenced in discussions about financial industry stability. The lessons learned from the FHLBB's tenure informed subsequent legislative efforts to strengthen the resilience of the financial system, impacting how agencies like the Federal Housing Finance Agency oversee institutions today, including commercial banks and credit unions that are members of the Federal Home Loan Bank System.
Limitations and Criticisms
The Federal Home Loan Bank Board, despite its initial success in providing liquidity during the Great Depression, faced significant limitations and criticisms, particularly leading up to its dissolution. A primary critique centered on its dual role as both a regulator of thrifts and the manager of the Federal Home Loan Banks, which lent to those very thrifts. This structure presented potential conflicts of interest, as the FHLBB was incentivized to support its member institutions, sometimes at the expense of rigorous capital requirements and sound supervisory practices. This regulatory capture was a contributing factor to the widespread insolvencies during the savings and loan crisis. Critics also pointed to the FHLBB's perceived inability to adapt quickly enough to the changing economic environment of the 1980s, where rising interest rates and deregulation exposed thrifts to greater risks without commensurate regulatory adjustments. The shortcomings in its oversight ultimately necessitated the sweeping reforms introduced by FIRREA, which dismantled the FHLBB and reorganized the regulatory framework for the industry.
Federal Home Loan Bank Board vs. Office of Thrift Supervision
The Federal Home Loan Bank Board (FHLBB) and the Office of Thrift Supervision (OTS) are often confused due to their sequential roles in regulating the U.S. savings and loan industry. The key distinction is that the FHLBB was the predecessor agency, abolished in 1989, while the OTS was its direct successor for thrift regulation. The FHLBB was created in 1932 as part of the Federal Home Loan Bank Act to charter, supervise, and regulate federal savings and loan associations and oversee the Federal Home Loan Bank System. Its broad mandate also included acting as the board of trustees for the Federal Savings and Loan Insurance Corporation (FSLIC). In contrast, the OTS was established under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) in 1989, specifically to take over the regulatory and supervisory functions of the FHLBB concerning savings institutions.,2 The OTS, initially a bureau within the Treasury Department, focused solely on the regulation of thrifts. It operated until 2011, when its functions were largely transferred to other agencies, primarily the Office of the Comptroller of the Currency (OCC), as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
FAQs
Why was the Federal Home Loan Bank Board created?
The Federal Home Loan Bank Board was established in 1932 by the Federal Home Loan Bank Act. Its primary purpose was to provide emergency funding and support to financial institutions that specialized in mortgage lending, thereby helping to stabilize the housing market and prevent widespread foreclosures during the Great Depression.
What happened to the Federal Home Loan Bank Board?
The Federal Home Loan Bank Board was abolished in 1989 by the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). This legislative action was a direct response to the widespread failures of savings and loan institutions during the savings and loan crisis of the 1980s.
Which agencies took over the FHLBB's functions?
Upon its abolition, the Federal Home Loan Bank Board's functions were divided. Its responsibility for regulating savings and loan institutions was transferred to the newly created Office of Thrift Supervision (OTS). The oversight of the Federal Home Loan Banks themselves was given to the Federal Housing Finance Board, which later merged into the Federal Housing Finance Agency (FHFA).,1
Did the FHLBB directly lend money to homeowners?
No, the Federal Home Loan Bank Board did not directly lend money to individual homeowners. Instead, it oversaw the Federal Home Loan Banks, which provided liquidity and funding to member financial institutions, such as savings and loan associations. These member institutions then used those funds to originate mortgage lending to consumers.