Brown asks for review of FHLBs advances to failed banks

Al Drago/Bloomberg

Sen. Sherrod Brown, D-Ohio, chairman of the Senate Banking Committee, pressed Federal Housing Finance Agency Director Director Sandra Thompson on the alleged use of the Federal Home Loan Bank System as a lender of last resort for banks in trouble. 

Brown's letter comes after the failures of Silicon Valley Bank and Signature Bank, as well as the collapse of Silvergate. All three institutions took advances from the Federal Home Loan Bank system prior to their collapse as they struggled for liquidity. 

"The FHLBank System was created to provide liquidity to sound institutions to facilitate lending. It was not structured to be a lender of last resort – or of next-to-last resort – for struggling institutions," Brown said in the letter. "If FHLBank members attempt to use the system as a financial backstop, it could have unintended consequences for the FHLBank System and for our broader financial system." 

Brown asked that Thompson, as part of a broader review of the Federal Home Loan Bank System, include a "detailed review" of the system's role in providing liquidity to banks in the days leading up to the recent bank failures, and whether those actions were consistent with the Federal Home Loan Bank's mission. 

Are Federal Home Loan Bank advances a sign of distress?

The Home Loan Bank System says it is working precisely as Congress intended it to, by lending to banks in stress. Critics say borrowings can spread undercapitalized banks' problems into the broader financial system.

The ability of the system to extend liquidity to banks at all times "raises concerns that members may attempt to draw on the system when they are experiencing financial instability or insolvency," according to the letter. 

Because of the advances to failed banks, among other instances of the Federal Home Loan Banks extending liquidity to troubled institutions, critics have called for more oversight of the banks, even calling the system "irrelevant" in housing finance. Some executives of the Federal Home Loan Banks, meanwhile, argue that the banks are working exactly as Congress intended.