A recent Bloomberg editorial under the headline "
Federal Home Loan banks are not your typical banks. They do not offer consumer products, do not have publicly traded stock or go on acquisition sprees — the exciting things that typically garner headlines for financial institutions. In fact, their cooperative structure, contrary to the Bloomberg piece, ensures that the risks of the Home Loan Bank System are low and well-managed. As such, while many U.S. financial institutions, financial regulators and debt market analysts engage with the Home Loan banks on some level nearly every day, the banks themselves are seldom in the press — until a crisis hits, and everyone is reminded of
To many in this newly expanded audience, the Federal Home Loan banks appeared like a new world on the horizon in March 2023 — a system of 11 cooperatives raising hundreds of billions of dollars of private capital in the debt markets in the span of just days to help stabilize a U.S. banking sector in dire need of liquidity. This new audience has sought to recast their "discovery," resulting in a misguided impression that the system needs "a clearly articulated mission" rather than focusing on its vast public benefits.
To be clear, providing liquidity to its members is the foundational mission of the Federal Home Loan Bank System. A dependable source of liquidity is as vital to the health of America's local lenders today as it was when Congress created the Home Loan banks at the height of the Great Depression. For over 90 years, the banks have helped ensure that financial institutions of various sizes and charter types have reliable access to liquidity when they need it, and time and again Congress has reaffirmed this mission and the regulatory community has recognized its utility.
Second, the Home Loan banks remain incredibly relevant to the housing market. While an increasing amount of mortgage originations are done by nonbanks that are not system members, the real question is who ends up holding those mortgages. There is no primary market without investors willing to acquire the mortgage in the secondary market, and investment in mortgages and mortgage securities not only sustains the overall housing market, but also makes mortgages more accessible and affordable for borrowers.
The top five community banks have more than $670 million in combined home equity loan portfolios as of March 31, 2023.
Federal Home Loan bank members continue to originate mortgages, and they also purchase mortgages originated elsewhere and hold them on their balance sheets, knowing that they can be pledged as collateral for secured funding at their Home Loan bank. This means the banks make a considerable impact on the mortgage market. In fact, a
But the public benefits of the system are even more fundamental. Home Loan bank credit products enhance the financial strength of our nation's local lenders, providing them with a reliable source of liquidity to meet the needs of their customers and communities and support their balance sheet management in all operating environments. This includes periods of extreme stress. It is important to note that the banks that failed in March did not do so because they borrowed from a Home Loan bank. However, access to Home Loan bank funding following those failures helped to keep a liquidity crunch from becoming a full-blown banking crisis by enabling hundreds, if not thousands, of other banks to tap precautionary liquidity from their Home Loan bank amid a most difficult operating environment.
The Home Loan Bank System not only reduces risk in the broader financial system, but also helps foster a diverse and vibrant national ecosystem of local lenders — one that does not exist in any other country. This means that virtually every community across the nation has access to a local lender. In the absence of access to on-demand Home Loan bank liquidity, America's local lenders would likely need to operate at lower loan-to-deposit ratios, stifling lending activity across the nation and reducing consumer access to credit. Without the Home Loan banks, the Federal Reserve would need to step in the provide such liquidity — a recommendation made by critics, and one that would essentially nationalize the U.S. banking system.
This is not how a nation of our size, with so many communities of diverse and varying needs, can or should operate. A key reason our country does not operate this way is because nine decades ago, the Home Loan banks were entrusted with the mission of ensuring a steady flow of liquidity to our nation's local lenders. Fortunately for all of us, the Home Loan banks have never run adrift of this mission. The only ones asking for trouble are those who suggest we get rid of these vital institutions.
