Republicans tout Federal Home Loan Banks' liquidity role

• Key insight: Republicans highlighted the Federal Home Loan Banks' role as a reliable liquidity backstop for member institutions.
• What's at stake: Discussion drafts considered at a House Financial Services Committee hearing would ease capital rules for the banks and designate FHLB advances as "core" deposits.
• Forward look: The discussion drafts set the stage for potential changes down the line, but have dim prospects for passage in the 119th Congress. 

WASHINGTON — House Financial Services Committee Republicans praised the Federal Home Loan Banks' role as a provider of liquidity, putting forward a number of discussion drafts of legislation that would bolster the system's ability to do so. 

"For decades, the federal home loan bank system has served as a reliable source of liquidity," said Rep. William Timmons, R-S.C. "By ensuring these institutions have dependable access to funding, the system has helped support local lending and expand access to credit for families, businesses, and communities. Much of this important work has taken place by making it easy to overlook the critical role the system plays in maintaining the strength and stability of our financial system." 

At a subcommittee meeting in the House Financial Services Committee to consider reform to the FHLBanks, Republican lawmakers asked both how to bolster the banks' role as a lender and to ease the way for more housing liquidity. 

"The Federal Home Loan Banks serve important and related dual roles," said Rep. Mike Flood, R-Neb., chairman of the subcommittee on housing. "They provide short-term liquidity to member institutions that can be used to provide more loans at the local level, and they provide direct assistance through grants in the Affordable Housing Program to communities across the country." 

The committee posted a number of discussion drafts of potential legislation ahead of the hearing, including one bill that would classify FHLB advances as "core" deposits. 

Those discussion drafts, however, have little chance of being developed into formal legislation that could be enacted before the end of the 119th Congress, after which time control of either chamber could potentially change hands after this fall's midterm elections. Even so, they could serve as a starting point for future legislation, particularly if Congress decides to revisit housing affordability in the wake of the bipartisan inroads made by the housing package that recently passed into law. 

During the Biden administration, the Federal Housing Finance Agency released a report that outlined a range of changes for the FHLB system, many of which were aimed at fulfilling the system's original role of helping Americans afford homes. The liquidity role came later and has periodically  sparked criticism. 

A few Democrats touched on those dynamics during the hearing. Rep. Ritchie Torres, D-N.Y., asked witnesses at the hearing whether the FHLBs have any disincentive to lend to a failing bank, especially when the costs of those advances might ultimately be borne by the Federal Deposit Insurance Corp. 

"I do feel like there's a problem of moral hazard here," he said. "It could be the case that the cure is worse than the disease."