What Is the Federal Home Loan Bank System (FHLB)?
The Federal Home Loan Bank System (FHLB) is a cooperative network of 11 regional banks across the United States that serves as a wholesale source of liquidity for its member financial institutions. Established within the broader category of Financial Institutions and Regulation, the FHLB System's primary mission is to support mortgage lending and community development by providing readily available funds to banks, credit unions, and insurance companies. This system acts as a "bank to banks," offering low-cost loans, known as advances, which member institutions can then use to finance residential housing and manage their balance sheet management needs71, 72, 73.
History and Origin
The Federal Home Loan Bank System was created by Congress in 1932 through the Federal Home Loan Bank Act, signed into law by President Herbert Hoover on July 22, 193269, 70. This establishment occurred during the Great Depression to address the severe liquidity shortfalls experienced by mortgage lenders, particularly savings and loan associations, which were struggling to provide financing for homeownership66, 67, 68. The FHLB System was designed to stabilize the housing market by providing a reliable source of funds, analogous in some ways to how the Federal Reserve System served commercial banks at the time64, 65.
Initially consisting of 12 regional, member-owned banks, the system has since consolidated to 1163. The Federal Home Loan Bank Act has been amended multiple times throughout its history, notably following the Savings and Loan Crisis of the 1980s and the Financial Crisis of 2008, to expand its membership eligibility to include commercial banks, credit unions, and insurance companies61, 62. The official text of the Federal Home Loan Bank Act outlines its provisions and subsequent amendments, reflecting its evolution in supporting the nation's housing finance system.60
Key Takeaways
- The Federal Home Loan Bank System (FHLB) comprises 11 regional, cooperative banks that provide wholesale funding to their member financial institutions.58, 59
- Its primary mission is to support residential mortgage lending and community development, serving as a critical source of liquidity, especially during periods of market stress.54, 55, 56, 57
- FHLBanks operate as Government-Sponsored Enterprise (GSEs) and are privately capitalized and owned by their members, receiving no taxpayer appropriations.50, 51, 52, 53
- Funds are primarily raised through the issuance of debt securities, known as consolidated obligations, in the capital markets.47, 48, 49
- Each FHLBank is required to set aside a portion of its income for its Affordable Housing Program (AHP), demonstrating its commitment to affordable housing.45, 46
Formula and Calculation
The Federal Home Loan Bank System itself does not involve a specific formula or calculation for its core operation as a direct lending entity to individuals. Instead, it provides "advances" (loans) to its member institutions. The pricing of these advances is typically a small spread over comparable U.S. Department of the Treasury obligations44.
However, for a member institution to receive advances, it must purchase stock in its regional FHLBank, proportionate to its mortgage holdings and assets, and maintain a minimum investment. This stock is held at par value and is not publicly traded.42, 43
Interpreting the Federal Home Loan Bank System
The FHLB System is interpreted as a vital component of the U.S. financial infrastructure, primarily serving as a reliable provider of wholesale liquidity to its members. Its role is to ensure that local lenders, regardless of size, have access to stable funding, particularly to support housing finance and community lending40, 41.
For individual financial institutions, access to FHLB advances can be a crucial tool for balance sheet management, allowing them to manage short-term cash flow needs, meet lending demands, and mitigate interest rate risk without relying solely on volatile deposit bases37, 38, 39. The ability to secure these advances by pledging various assets as collateral (such as residential mortgages or mortgage-backed securities) provides a secure and efficient funding mechanism for members34, 35, 36.
Hypothetical Example
Imagine a regional commercial bank, "Community Savings Bank," experiences a surge in demand for new home mortgages but its deposit base hasn't grown commensurately. To avoid turning away qualified borrowers and to maintain its lending capacity, Community Savings Bank, which is a member of its regional Federal Home Loan Bank, decides to seek an advance.
Community Savings Bank pledges a portfolio of high-quality residential mortgages as collateral to its FHLBank. The FHLBank then provides a multi-million dollar advance to Community Savings Bank. With this new liquidity, Community Savings Bank can continue to originate new mortgage loans, supporting local homeownership and the local economy. This transaction allows the bank to manage its assets and liabilities effectively, ensuring it can meet customer demand even when local deposits are insufficient.
Practical Applications
The Federal Home Loan Bank System has several practical applications across the financial landscape:
- Mortgage Market Support: The FHLB System serves as a fundamental pillar for mortgage lending, ensuring a continuous flow of funds to finance residential housing. This helps make homeownership more accessible and supports the broader housing market.30, 31, 32, 33
- Liquidity Management: For its diverse membership, including commercial banks, credit unions, and insurance companies, the FHLB acts as a reliable source of liquidity. Members can obtain short- or long-term advances to meet funding needs, manage asset-liability mismatches, or navigate periods of market volatility.27, 28, 29
- Community and Economic Development: Beyond housing, the FHLBs are mandated to support broader community development initiatives. Through programs like the Affordable Housing Program (AHP), a percentage of each FHLBank's net income is allocated to grants for low-income housing projects and other community investment programs.24, 25, 26
- Financial Stability: By providing a stable, on-demand source of funding to a wide array of financial institutions, the FHLB System contributes to overall financial stability, helping to prevent liquidity shortfalls from cascading into broader systemic issues.22, 23 The Congressional Budget Office (CBO) provides detailed insights into how FHLBs operate and their role in the financial system.21
Limitations and Criticisms
Despite its crucial role, the Federal Home Loan Bank System faces certain limitations and criticisms. One area of debate centers on the FHLB System's evolving mission and its perceived role as a "lender of next-to-last resort," particularly during periods of financial stress19, 20. Some critics argue that the system's broad mandate and the implicit government guarantee it receives (allowing it to borrow at lower rates than private institutions) might encourage excessive risk-taking by member institutions17, 18.
Concerns have also been raised regarding the system's support for smaller-to-medium-sized banks versus larger institutions, although proponents argue that a significant portion of FHLB membership consists of small and community banks16. Furthermore, the system is sometimes critiqued for its governance structure and compensation practices, though defenders highlight the FHLBanks' commitment to affordable housing, often surpassing statutory requirements, and their self-sustaining financial model.14, 15 A report by the Urban Institute offers a perspective on these criticisms and the benefits the system provides.13
Federal Home Loan Bank System vs. Federal Reserve System
While both the Federal Home Loan Bank System (FHLB) and the Federal Reserve System provide liquidity to financial institutions, their primary mandates, memberships, and operational structures differ significantly.
The FHLB System was established specifically to support housing finance and community development, primarily serving a membership of deposit-taking institutions (like commercial banks and credit unions) and insurance companies that focus on mortgage lending. It provides collateralized loans, or "advances," based on a cooperative model where member institutions own stock in their regional FHLBank. The FHLB System is privately capitalized by its members and funds its operations by issuing consolidated obligations in the capital markets.
In contrast, the Federal Reserve System, as the central bank of the United States, has a broader mandate focused on monetary policy, maintaining financial stability, and supervising banks. It provides liquidity through its discount window to a wider range of depository institutions, acting as a "lender of last resort" to the banking system. Unlike the FHLB, the Federal Reserve directly influences the money supply and interest rates through various policy tools. Historically, the FHLBs were established because thrifts and other mortgage lenders did not have direct access to the Federal Reserve's emergency lending facilities.12
FAQs
How many Federal Home Loan Banks are there?
There are 11 regional Federal Home Loan Banks that collectively form the Federal Home Loan Bank System.11
Does the FHLB System receive taxpayer money?
No, the Federal Home Loan Bank System is privately capitalized and owned by its member financial institutions. It funds its operations primarily through the issuance of debt securities in the capital markets and does not receive taxpayer appropriations.8, 9, 10
Who can borrow from a Federal Home Loan Bank?
Membership in a Federal Home Loan Bank is open to eligible financial institutions, including commercial banks, credit unions, savings banks, insurance companies, and certified community development financial institutions.4, 5, 6, 7
What is the primary purpose of the Federal Home Loan Bank System?
The primary purpose of the FHLB System is to provide liquidity to its member financial institutions to support residential mortgage lending and community development across the United States.1, 2, 3