What Is the Federal Home Loan Bank System – FHLB?

The Federal Home Loan Bank (FHLB) System is an organization created by the Federal Home Loan Bank Act of 1932 to increase the amount of funds available for lending institutions who provide mortgages and similar loan agreements to individuals. This system was created in response to the economic conditions of the Great Depression, which had impaired the U.S. banking system.

How the Federal Home Loan Bank System – FHLB Works

The Federal Home Loan Bank System includes the following 11 banks:

  • 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

The Federal Home Loan Banks were created by the government through the Federal Home Loan Bank Act to provide an additional source of real-estate-lending support for the U.S. banking system. These banks are exempt from federal and state taxes. Their structuring is detailed in the Federal Home Loan Bank Act. Their functions in the banking system greatly differ from other government-created entities such as Fannie Mae, Freddie Mac, and Ginnie Mae. Their focused objective targeting the real estate market specifically also distinctly differentiates them from the Federal Reserve banks. The Federal Home Loan Banks lend to members through various housing initiative programs and also offer cash advances.

How Do Banks Use the Federal Home Loan Bank System – FHLB?

Federal Home Loan Banks are structured as privately capitalized corporations with no taxpayer-assisted funding. The banks deploy a membership structure that requires members to purchase private stock. Members include various types of financial institutions. The Federal Housing Finance Agency is the government bureau charged with FHLB oversight. It also regulates the requirements for FHLB membership, among which include involvement in real estate lending.

To provide for greater funding capital, the Federal Home Loan Banks also issue discount notes and term debt in the capital markets, known as consolidated obligations. Debt issuance from a FHLB is managed by the FHLB Office of Finance. The Office of Finance provides issuance services for all 11 banks. While debt is issued individually by each bank in the capital market, it is backed collectively by all banks in the system, providing for a lower-risk investment.

Lending from the Federal Home Loan Banks is funded from equity and debt issuance. Member banks have access to low-cost funding, which is reviewed based on its purpose of use. A primary lending product available for member banks is cash-advance loans. Advances are generally available to members immediately if approved. Member banks also have the benefit of negotiating the structure of cash-advance terms to meet their specific needs.

FHLBs also offer credit through various programs. Popular programs include the Affordable Housing Program, Community Investment Program, Mortgage Partnership Finance Program and Mortgage Purchase Program.