Introduction to the Federal Home Loan Bank System (FHLB)
The Federal Home Loan Bank System (FHLB) is a vital network comprising 11 regional banks dispersed across the U.S. This consortium provides a steady stream of liquidity to other banks and lenders, fostering housing development, infrastructure projects, economic growth, and addressing various individual and community needs. Remarkably, the FHLB is overseen by a government bureau, yet each participating bank is privately capitalized and operates without taxpayer funding.
Key Insights
- The FHLB network consists of 11 regional banks that supply liquidity to other banks, facilitating funds for consumers and businesses.
- Established during the Great Depression, the FHLB continues to be pivotal in ensuring economic stability.
- Operating as private cooperatives, FHLB banks receive no government funding.
- FHLB banks primarily raise funds by issuing bonds known as consolidated obligations.
- Focused on mortgage financing and community investments, FHLB banks offer low-cost loans to member banks, benefiting customers.
Understanding the Mechanism Behind the FHLB System
Structurally, the 11 regional banks within the Federal Home Loan Bank System are privately capitalized corporations functioning as cooperatives. Owned by local financial institutions that buy stock in the FHLBank, membership is contingent upon engaging in real estate lending. Notably, these cooperatives pay no federal or state income taxes.
FHLB Regional Banks
The 11 regional banks are strategically spread throughout the country, each serving a specific geographic region comprising several states. The FHLBanks include:
- Federal Home Loan Bank of Atlanta
- Federal Home Loan Bank of Boston
- Federal Home Loan Bank of Chicago
- Federal Home Loan Bank of Cincinnati
- Federal Home Loan Bank of Dallas
- Federal Home Loan Bank of Des Moines
- Federal Home Loan Bank of Indianapolis
- Federal Home Loan Bank of New York
- Federal Home Loan Bank of Pittsburgh
- Federal Home Loan Bank of San Francisco
- Federal Home Loan Bank of Topeka
Approximately 6,600 banks, credit unions, insurance companies, thrifts, and certified community development financial institutions are part of the FHLB system, drawing the required funding from it.
FHLB Services
Operating as cooperatives, FHLBanks manage moderate costs and overhead, reflecting in lower interest rates for their member banks. This results in low-cost loans accessible to customers through member banks.
The primary role of FHLBanks is real estate financing. Unlike other government-sponsored enterprises like Fannie Mae and Freddie Mac, FHLBanks do not guarantee or insure mortgage loans. Instead, they act as a “bank to banks” by providing long- and short-term advances to members and offering specialized grants and loans to encourage affordable housing and economic development. Moreover, FHLBanks often provide secondary market outlets for members selling mortgage loans.
Federal Programs Supported by FHLB
FHLBanks are also deeply involved in various federal programs, such as:
- Affordable Housing Program
- Community Investment Program
- Mortgage Partnership Finance Program
- Mortgage Purchase Program
A significant 80% of U.S. lending institutions depend on Federal Home Loan Banks.
Funding the FHLBanks
Funds for the Federal Home Loan Banks are primarily raised by issuing bonds, discount notes, and other forms of term debt, collectively known as consolidated obligations. These activities are handled by the FHLB Office of Finance and are collectively backed by all banks in the system, mitigating the risk for investors.
Historical Context of the FHLB System
The Federal Home Loan Bank System was conceived in response to the Great Depression, which severely impacted the U.S. economy and banking sector. Established by the 1932 Federal Home Loan Bank Act, the primary goal was to make homeownership more attainable by providing banks with inexpensive funds for mortgage lending.
Originally consisting of 12 independent regional banks, the FHLB system witnessed a consolidation in 2015 when the Seattle and Des Moines banks merged, reducing the number to 11. The system was initially overseen by the Federal Home Loan Bank Board until it was succeeded by the Federal Housing Finance Board in 1989 and then by the Federal Housing Finance Agency in 2008.
For much of its history, the FHLB’s member institutions predominantly comprised savings and loan associations until commercial banks and insurance companies increasingly joined the ranks, especially from the 1980s onward.
Impact and Criticism of the FHLB System
Proponents highlight the critical role played by the Federal Home Loan Bank System in ensuring a steadfast flow of funds to the residential mortgage market, credited with making homeownership feasible for millions. Besides, FHLBs extend funding for rental properties, small businesses, and diverse neighborhood development projects, fostering economic growth, community development, and creating employment opportunities.
However, critics argue that FHLBs, through federally subsidized programs, disproportionately influence housing market economics, potentially fostering irresponsible lending practices and more pronounced cyclicality in real estate markets.
FHLBanks have largely remained resilient during financial crises, such as the 2008 subprime mortgage crisis, when they required no government bailouts unlike their peers Fannie Mae and Freddie Mac. Instead, they increased lending when other funding sources were scarce.
Snapshot
- As of Dec. 31, 2021, FHLBanks collectively held $723.2 billion in combined assets.
FAQs About the Federal Home Loan Bank System
Is Federal Home Loan Bank a Government Agency or Bank?
The Federal Home Loan Bank System serves as a unique, government-sponsored entity fostering community investments and mortgage lending. Though created by the Federal Home Loan Bank Act, it operates independently from the government.
How Many FHLBanks Are There?
The network consists of 11 regional banks, each fulfilling the specific needs of different U.S. regions.
Does the FHLB System Loan Money to Individuals?
No, the FHLB System banks provide loans to other financial institutions primarily to support real estate loans, rather than lending directly to individuals.
Related Terms: Federal Housing Finance Agency, Affordable Housing Program, Mortgage Partnership Finance Program, Federal Home Loan Bank Act, Great Depression, government-sponsored enterprises
References
- Federal Deposit Insurance Corporation. “Federal Home Loan Bank System”, Page 5.
- Federal Housing Finance Agency. “Federal Home Loan Bank Act”.
- Federal Deposit Insurance Corporation. “Federal Home Loan Bank System”, Page 7.
- FHLBanks Office of Finance. “Office of Finance Publishes the Third Quarter 2021 Combined Financial Report of the Federal Home Loan Banks”.
- Federal Deposit Insurance Corporation. “Federal Home Loan Bank System”, Page 6.
- FHLBanks Office of Finance. “About Debt Securities”.
- Supreme Court of the United States. “Collins v. Yellen”.
- Federal Housing Finance Agency. “Sandra L. Thompson Announced as Acting Director of FHFA”.
- Federal Register. “Multiple Federal Home Loan Bank Memberships”.
- Federal Housing Finance Agency. “Federal Home Loan Bank Membership Data”.
- Federal Home Loan Banks. “Combined Financial Report for the Year Ended December 31, 2021”, Page 47.
- Board of Governors of the Federal Reserve System. “The Increased Role of the Federal Home Loan Bank System in Funding Markets, Part 3: Implications for Financial Stability”.
- Federal Housing Finance Agency. “The Federal Home Loan Bank System”.
