The Foundation of Local Lending
The Federal Home Loan Bank (FHLB) system was created by Congress in 1932 during the Great Depression. At a time when thousands of banks had failed, the housing market was collapsing because reliable funding for home loans had dried up. The Federal Home Loan Bank Act established the FHLB system to provide a steady stream of capital to lenders, ensuring they could continue offering mortgages and helping to stabilize the U.S. economy.
Though its role has evolved, the core mission remains: to provide a reliable source of liquidity to its members to support housing finance and community development.
How Does the FHLB System Operate?
While you won’t interact with an FHLB directly, its operations are critical to the function of your local bank or credit union. The system works as a cooperative owned by its members.
- Membership: Financial institutions like commercial banks, credit unions, savings institutions, and insurance companies can join the system by purchasing stock in their regional FHLB. This ownership stake gives them access to FHLB services and funding.
- Raising Funds: FHLBs do not take customer deposits. Instead, they raise money by issuing bonds, known as consolidated obligations, in the global capital markets. Because the FHLBs are considered highly secure Government-Sponsored Enterprises (GSEs), they can borrow money at very low interest rates.
- Providing Advances: The core service of the FHLBs is providing loans, called “advances,” to their members at rates lower than what the members could typically secure on their own. Members must provide collateral, usually high-quality assets like mortgage loans or government securities, to secure these advances.
- Supporting Local Lending: With this access to liquidity, member institutions can manage their balance sheets more effectively and have more capital available to lend for mortgages, small business loans, and other community projects.
Key FHLB Programs and Services
Beyond advances, FHLBs provide several other key services that support their members and communities.
| Service or Program | Description |
|---|---|
| Advances | Low-cost, flexible loans to member institutions, allowing them to fund operations and expand lending without relying solely on customer deposits. |
| Affordable Housing Program (AHP) | By law, each FHLB must contribute at least 10% of its net income to the AHP, which provides grants to help acquire, build, and preserve affordable homes. |
| Community Development | FHLBs offer programs that support neighborhood revitalization, small business growth, and economic development in partnership with commercial lenders and other members. |
| Correspondent Services | Many FHLBs provide essential services like payment processing and cash management for smaller member institutions that may lack the scale to perform these functions efficiently. |
FHLBs vs. Other Financial Entities
It’s common to confuse FHLBs with other entities in the financial system. Here are the key distinctions:
- They are not direct government agencies. FHLBs are GSEs, meaning they have a public mission but are privately owned and capitalized by their member institutions. They receive no direct taxpayer funding.
- They do not lend to individuals. As wholesale banks, they only provide services to member financial institutions, not the general public.
- They are different from Fannie Mae and Freddie Mac. While all three are GSEs regulated by the Federal Housing Finance Agency (FHFA), their functions differ. Fannie Mae and Freddie Mac primarily operate in the secondary mortgage market by purchasing mortgages from lenders. In contrast, FHLBs provide direct loans (advances) to their member institutions.
Frequently Asked Questions About the FHLB System
Who regulates the Federal Home Loan Banks?
The Federal Home Loan Banks are regulated by the Federal Housing Finance Agency (FHFA), an independent federal agency created in 2008. The FHFA ensures the FHLBs, as well as Fannie Mae and Freddie Mac, operate in a safe and sound manner and fulfill their public mission.
Can I get a loan directly from an FHLB?
No. Individuals and businesses cannot get loans directly from an FHLB. They are wholesale banks that only lend to their member institutions. To get a mortgage loan or business loan, you must apply through a member bank or credit union.
How do FHLBs benefit consumers?
FHLBs help create a more stable and competitive lending environment. By providing low-cost funding to local lenders, they help ensure that mortgages and small business loans are more available and potentially more affordable for consumers across the country.
External Resources: For more information, visit the official website of the Council of Federal Home Loan Banks.
Sources:
Federal Housing Finance Agency (FHFA). (n.d.). About the Federal Home Loan Bank System. FHFA.gov.