Federal Home Loan banks issued $304 billion to meet liquidity demands

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The Federal Home Loan Bank System was created during the Depression to fund home loans. It issued a combined $304 billion in advances last week to mostly regional and community banks needing liquidity.

The Federal Home Loan Bank System issued $304 billion in debt last week, double the amount of liquidity that banks have sought from the Federal Reserve's discount window and a new funding program. 

The $1.25 trillion-asset Home Loan Bank System has become the go-to source of cash for regional and community banks looking for liquidity. Last week, the Home Loan banks collectively issued $303.9 billion in discount notes and bonds to meet member demand and to maintain liquidity for the 11 regional banks themselves. The system was created during the Depression to fund home loans and is owned by its 6,500 members, including banks of all sizes, insurance companies and credit unions. 

The system's issuance dropped dramatically from $111.8 billion issued on Monday — the largest single day of issuance in the Home Loan banks' 90-year history — to $21.7 billion on Friday. The private cooperative of 11 regional banks, which is structured as a government-sponsored enterprise, issues bonds that are backed by an implied government guarantee. The total debt issued last week included $151 billion in longer-term bonds, $143 billion in notes that mature in less than a year and another $9.9 billion in discount note auctions. 

The Fed's Bank Term Funding Program is serving as a supplement to the central bank's discount window, its standard last-resort lending facility. Last week, banks received $152 billion through the Fed's discount window and $11.9 billion from the Bank Term Funding Program, according to the Fed

The Home Loan banks are designed to provide liquidity during market stress. Agency bonds are  highly liquid and the system can issue a significant amount of bonds even when other financial institutions have lost access to liquidity. Thousands of financial institutions are using loans, in the form of advances, to manage both liquidity and interest rate risk.

But the failures of two regional banks, Silicon Valley Bank in California and Signature Bank in New York, have renewed concerns that the system is influencing banks' borrowing strategies and could be taking on more risk. The Home Loan Bank System has a "super lien" priority ahead of other creditors and the Federal Deposit Insurance Corp. 

Banks also can borrow from the Home Loan banks without triggering a run on deposits because of the lag time in banks' reporting borrowings on call reports. Call report data filed on March 31 will not get publicly reported until early May.

"The Home Loan Banks probably are providing a service in these times, but I don't think that they were created for that purpose, nor do I feel that they are adequately coordinated with the Federal Reserve and Treasury in carrying out that purpose," said Stephen M. Cross, a financial industry advisor at Alvarez and Marsal, former deputy director at the Federal Housing Finance Agency, and former bank regulator. "The Federal Home Loan Banks are acting as the system's liquidity backstop and I believe that's outside of their core mission and it should be the responsibility of the Treasury, and the Federal Reserve and the FDIC." 

A $13.5 billion advance to Silicon Valley Bank months before its collapse is another sign that the Home Loan banks encourage risk-taking that can burden the Federal Deposit Insurance Corp. or even the system itself, critics say.

March 10
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Last year, the Federal Housing Finance Agency launched the first major review of the system in 90 years. Critics contend the Home Loan banks are operating as a "lender of next-to-last report," or as a shadow central bank with advances far exceeding borrowings from the Fed's discount window and the new Bank Term Funding Program.

"We cannot afford the luxury of having two central banks, let alone the confusion of having two," said Cornelius Hurley, a lecturer at Boston University School of Law, who served for 14 years on the board of the Federal Home Loan Bank of Boston. 

Hurley, who is among the system's harshest critics, has said the Home Loan banks' mission "was never meant to be a central bank for privately-owned banks." 

Last year, the Federal Home Loan Bank System issued $823 billion in advances or outstanding secured loans backed by highly-liquid collateral, including Treasuries, agency securities and mortgage-backed securities. The debt is bought by a broad investor base that includes money market mutual funds, bond funds, plus state and local municipal funds among other investors. 

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