What Is the Federal Home Loan Bank (FHLB) System?

What Is the Federal Home Loan Bank (FHLB) System?

Let me explain the Federal Home Loan Bank (FHLB) System directly: it's a network of 11 regional banks in the U.S. that supplies reliable funding to other banks and mortgage lenders. This supports financing for housing, infrastructure, economic development, and various individual and community needs. The Federal Housing Finance Agency (FHFA) oversees the entire system.

You should know that while a government agency regulates the FHLB and its mission serves a public purpose, each bank is privately capitalized. They don't get any government funding at all.

Key Takeaways

Here's what you need to grasp about the FHLB: it's a network of 11 regional banks that channel cash to other banks, ensuring money keeps flowing to consumers and businesses. The federal government created it during the Great Depression. Remember, the FHLB gets no taxpayer funding—its banks are private cooperatives. They mainly raise money by issuing bonds known as consolidated obligations. Their focus is on mortgage financing and community investments, offering low-cost loans that member banks pass on to their customers.

How the Federal Home Loan Bank (FHLB) System Works

The 11 regional banks in the FHLB System, called FHLBanks, are set up as privately capitalized cooperatives. They're owned by their members, which are local financial institutions that purchase stock in the FHLBank. To join, these institutions must be involved in real estate lending. As cooperatives, the FHLBanks don't pay federal or state income taxes.

What Banks Are Part of the Federal Home Loan System?

The 11 FHLBanks are spread across the country, each covering a geographic region of several states. You can find them listed as the Federal Home Loan Bank of Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, and Topeka. Approximately 6,500 banks, credit unions, insurance companies, thrifts, and certified community development financial institutions are members and receive funding from the system.

FHLB Services

As cooperatives, FHLBanks keep costs and overhead low, which shows in the interest rates they charge member banks. This gives member banks access to cheap loans that they can then lend to their customers.

Their main focus is real estate financing. Unlike other government-sponsored enterprises like Fannie Mae and Freddie Mac, FHLBs don't guarantee or insure mortgage loans. Instead, they function as a 'bank to banks' by offering long- and short-term loans called advances, plus specialized grants and loans for affordable housing and economic development. Sometimes, they provide secondary market outlets for members selling mortgage loans.

FHLBanks work through federal programs such as the Affordable Housing Program, Community Investment Program, Mortgage Partnership Finance Program, and Mortgage Purchase Program. About 80% of U.S. lending institutions rely on them.

How the Federal Home Loan Banks Are Funded

The FHLBanks raise funds by issuing bonds, discount notes, and other debt in the capital markets—these are called consolidated obligations. The FHLB Office of Finance handles debt issuance for all 11 banks. Each debt is issued by individual banks but backed by the whole system, making it a lower-risk investment.

It's important to note that on June 23, 2021, the U.S. Supreme Court ruled the FHFA head could be removed without cause. That same day, President Biden removed the Trump-appointed director and appointed Sandra L. Thompson, who was confirmed in June 2022.

History of the FHLB System

The FHLB System emerged from the Great Depression, which hit the U.S. economy and banking sector hard. It was established by the Federal Home Loan Bank Act of 1932, the first of several laws aimed at making homeownership more accessible. The idea was to give banks low-cost funds for mortgages, encouraging more loans and stimulating the housing market.

Originally, there were 12 independent regional wholesale banks, funded with $125 million. In 2015, the Seattle and Des Moines banks merged, leaving 11. The Act created the Federal Home Loan Bank Board for oversight, which ended in 1989. Responsibility shifted to the Federal Housing Finance Board and Office of Thrift Supervision, and since 2008, the FHFA regulates it under the Housing and Economic Recovery Act.

For most of its 89 years, savings and loan institutions were the main members, but their numbers dropped after the 1980s Savings and Loan Crisis. Now, commercial banks (allowed since 1989) and insurance companies dominate the membership.

Impact of the Federal Home Loan Bank System

Supporters say the FHLB System ensures steady funds to the residential mortgage market, enabling housing and homeownership for millions. It also funds rental properties, small businesses, and neighborhood development, leading to economic growth, jobs, stronger communities, and better living standards.

Critics argue that through federally subsidized programs, it distorts housing market economics, encouraging risky lending and volatile cycles. There's concern that growing membership and reliance on FHLB funding, plus financial interconnectedness, could spread distress across markets and the economy.

As of December 31, 2023, FHLBanks hold about $1.3 trillion in combined assets. They've faced difficulties, like the Seattle bank's merger due to losses, but overall practices are solid. During the 2008 crisis, they didn't need bailouts like Fannie Mae and Freddie Mac—in fact, they ramped up lending when other sources failed.

Is the FHLB System a Government Agency or Bank?

The FHLB System was created as a government-sponsored entity to support community investments and mortgage lending. It's not a government agency, but it stems from the Federal Home Loan Bank Act.

How Many Federal Home Loan Banks Are There?

The FHLB isn't a single bank—it's a network of 11 regional banks that provide cash to other banks for their use.

Does the FHLB System Loan Money to Individuals?

No, the FHLB banks loan to other lending institutions, mainly to support real estate loans.

The Bottom Line

To wrap this up, the Federal Home Loan Bank System includes 11 U.S. regional banks that supply steady cash to other banks and lenders. This flow of funds helps provide capital for housing, infrastructure, economic development, and other needs. A government bureau oversees it, but the banks are privately capitalized without government funding.