Last November, the Federal Housing Finance Agency (FHFA) published its much-anticipated report on the Federal Home Loan Bank (FHLB) System. While well intended, the 142-page report – FHLBank System at 100: Focusing on the Future – proposes several reforms that are not needed and risk undermining a system that already works remarkably well at providing quick liquidity to those in need.
First established in 1932 as part of the Federal Home Loan Bank Act, the FHLB System is a government-sponsored enterprise (GSE) and series of “11 regionally based, wholesale suppliers of lendable funds to financial institutions of all sizes and many types.” These financial institutions, including community banks, credit unions, and other community lenders, rely on the FHLB System for a wide range of financial services.
One of the primary services FHLBanks provides member institutions is low-cost loans called advances, essentially loans backed by eligible collateral and paid back with interest. In turn, member institutions use these advances to fund loans to local businesses and community institutions requiring access to quick capital. This can be particularly important during periods of market volatility, such as during the 2007 Subprime Mortgage Crisis, or more recently during the 2019 COVID-19 pandemic.
As the FHFA mentions in the report, “A key function of the FHLBanks is to provide low-cost, stable, and reliable funding to creditworthy members, primarily in the form of advances.” Unfortunately, the FHFA has proposed several statutory and regulatory reforms that could unintentionally undermine this function.
While some proposals are limited and revolve around enhanced transparency, others are rather major and could “significantly alter the structure and operation of the FHLB System,” as well as make it more difficult for some member institutions to obtain quick access to liquidity as they have done in the past.
Of particular concern are recommendations to revise the definition of long-term advances, tighten requirements for obtaining advances, and enhance certain FHLB System membership criteria, such as requiring all prospective member institutions to demonstrate a commitment to housing finance.
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Nate Scherer is a policy analyst with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit us at www.TheAmericanConsumer.Org or follow us on X @ConsumerPal.