Late last year, the Federal Housing Finance Agency (FHFA) released a study proposing potentially harmful reforms to the Federal Home Loan Bank (FHLB). Of particular importance are measures that could dissuade larger banks from becoming members of the FHLB system, which would only undermine the system’s ability to offer reliable low-cost liquidity. Despite being the FHLB’s chief regulator, the FHFA fundamentally misunderstands what makes the FHLB so integral to small and local banking. In a new study published this week, the American Consumer Institute (ACI) helps set the record straight.
The FHLBs are government-sponsored enterprises (GSE) charted as cooperatives, and this is important to understand as their members are American banks, both large and small. The GSE moniker comes from its founding by President Hoover as an entity tasked with protecting the U.S. housing market as well as ensuring a vibrant banking system.
Though its membership has expanded beyond traditional Savings and Loan banks, which comprised the bulk of the housing market during the first half of the century, the FHLB’s role has not changed, and for good reason. The FHLB remains focused on supporting housing and community development that the financial sector relies on. By law, each FHLBank must contribute 10 percent of its net income to its Affordable Housing Program. However, according to the Council of Federal Home Loan Banks, all 11 FHLBs have voluntarily agreed to increase their contribution amount to 15 percent, which will dedicate $1 billion to affordable housing and community development initiatives this year.
Due to its unique private debt solicitation system, the FHLB can afford generous housing programs without costing taxpayers a dime. Because FHLBanks have a statutory super-lien, preceded by a uniform commercial code, they have priority as a secured lender. Thus, their advances are highly secure, making their debt securities extremely low-risk and attractive for investors, which include states and municipalities, pension plans, and private investors.
Funds acquired through the private sale of highly secure debt go towards providing liquidity to mostly medium-sized and smaller banks. Bank call reports show that lenders with assets between $10 billion and $250 billion, or between $1 billion and $10 billion, are the first and second most consistent users of FHLB liquidity.
Read the full article here.
Isaac Schick and Steve Pociask are with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on X @ConsumerPal.