What Is the Federal Home Loan Bank System (FHLB)?
The Federal Home Loan Bank System (FHLB) is a consortium of 11 regional banks across the U.S. that provide a reliable stream of cash to other banks and lenders to finance housing, infrastructure, economic development, and other individual and community needs. The Federal Housing Finance Agency oversees the FHLB.
While the FHLB is overseen by a government bureau and its mandate reflects a public purpose, each FHLBank is privately capitalized and does not receive any government funding.
- The FHLB is a network of 11 regional banks that provide cash to other banks in order to keep money flowing to consumers and businesses.
- The FHLB was created by the federal government during The Great Depression, but it receives no taxpayer funding: Its banks are private cooperatives.
- FHLBanks raise funds primarily from issuing bonds called consolidated obligations.
- FHLBanks focus on mortgage financing and related community investments, providing low-cost loans that member banks can pass on to customers.
How the Federal Home Loan Bank (FHLB) System Works
The 11 regional banks that comprise the Federal Home Loan Bank System, known as FHLBanks, are structured as privately capitalized corporations—specifically, as cooperatives. They are owned by their members, local financial institutions which buy stock in the FHLBank. The institutions must engage in real estate lending as a condition of membership. As cooperatives, the FHLBanks pay no federal or state income taxes.
The 11 banks of the Federal Home Loan Bank System are scattered around the country. Each one services a geographic region made up of several states. The 11 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
There used to be 12 FHLB Banks. But in 2015, the Federal Home Loan Bank of Seattle merged with the Federal Home Loan Bank of Des Moines. The institution is headquartered in Des Moines and maintains a western office in Seattle.
As cooperatives, FHLBanks maintain moderate costs and overhead, which are reflected in the interest they charge their member banks. This means the member banks have access to low-cost loans, which they, in turn, lend to their customers.
The FHLBanks' primary focus is real estate financing. Unlike the other real estate-oriented government-sponsored enterprises—Fannie Mae and Freddie Mac—FHLBs do not guarantee or insure mortgage loans, however. Instead, FHLBs act as a “bank to banks” by providing long- and short-term loans, called “advances,” to their members, as well as specialized grants and loans aimed at increasing affordable housing and economic development. In some cases, FHLBs also provide secondary market outlets for members interested in selling mortgage loans.
FHLBanks participate in and operate through various federal programs. These include the Affordable Housing Program, the Community Investment Program, the Mortgage Partnership Finance Program, and the Mortgage Purchase Program.
About 80% of U.S. lending institutions rely on Federal Home Loan Banks.
The approximate number of banks, credit unions, insurance companies, thrifts, and certified community development financial institutions that are members of the FHLB and receive funding from it.
How the FHLBanks are Funded
To raise funds, the Federal Home Loan Banks issue bonds, discount notes, and other forms of term debt in the capital markets. These are known as consolidated obligations.
Debt issuance for all 11 banks is managed by the FHLB Office of Finance. While each debt instrument is issued individually by each bank, it is backed collectively by all banks in the system, providing for a lower-risk investment.
History of the FHLB System
The Federal Home Loan Bank System developed in response to the Great Depression, which was devastating the U.S. economy—especially the banking industry. It was created by the Federal Home Loan Bank Act of 1932, the first in a series of bills that sought to make homeownership an achievable goal for more Americans. The rationale was that providing banks with low-cost funds to be used for mortgages would make them more likely to offer loans, As a result, individuals would find it easier to borrow money to buy homes, thus stimulating the residential real estate market.
The FHLB originally consisted of 12 independent, regional wholesale banks (similar to the 12 regional Federal Reserve Banks). The Act provided them with total funding of $125 million. In 2015, though, the Seattle and Des Moines banks merged, reducing the total number of FHLBanks to its current 11.
The Act also created the Federal Home Loan Bank Board to oversee the system. The Board was discontinued in 1989, and oversight responsibility was transferred to the Federal Housing Finance Board (FHFB) and regulatory responsibility to the Office of Thrift Supervision (OTS). Since 2008, the FHLB has been regulated by the Federal Housing Finance Agency, created by the Housing and Economic Recovery Act (HERA).
On June 23, 2021, the U.S. Supreme Court ruled that the head of the Federal Housing Finance Agency (FHFA), which oversees the FHLB, could be removed without cause. Later the same day, President Joe Biden removed Trump-appointed FHFA Director Mark Calabria and appointed Sandra L. Thompson as acting director.
For much of the FHLB's 89-year history, savings and loan institutions dominated the ranks of its member financial institutions. Their numbers began to dwindle in the 1980s and '90s, after the Savings and Loan Crisis. In the 21st century, commercial banks, which were allowed to join the system in 1989, and insurance companies have come to make up most of the membership.
Impact of the Federal Home Loan Bank System
Proponents of the Federal Home Loan Bank System argue it plays a critical role in the continuous flow of funds to the residential mortgage market, making housing and homeownership possible for millions. FHLBs also provide funding for rental properties, small businesses, and other neighborhood development initiatives, resulting in economic and employment growth, stronger local communities, and a higher overall quality of living.
However, critics claim that the FHLB, via its use of federally subsidized programs, distorts the basic supply-and-demand economics of the housing market. Funding through the FHLB, they argue, encourages irresponsible lending and a residential real estate cycle with more volatile booms and busts.
The amount in total combined assets held by FHLBanks in 2020.
There are also concerns that the recent growth in the Federal Home Loan Bank members and increased reliance on FHLB funding, along with the increasing interconnectedness of the financial system, could mean that any distress among FHLBanks could spread more widely throughout the capital markets and the economy.
FHLBanks have had their share of financial difficulties over the years—in fact, it was an inability to recover from capital losses that led FHLB Seattle to merge with FHLB Des Moines. However, their practices overall remain strong. During the subprime mortgage-induced 2008 financial crisis, for example, the FHLBanks did not require any government bailouts, as sister government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac did. in fact, as other sources of funding dried up, they increased their lending.