The Federal Home Loan Bank (FHLB) System is a consortium of 11 regional banks created to ensure liquidity and support for the U.S. lending institutions. By providing reliable access to funding, the FHLB System plays a crucial role in stabilizing and enhancing the housing finance sector.
Definition
What is the Federal Home Loan Bank (FHLB) System?
The Federal Home Loan Bank (FHLB) System is a network of regional banks across the United States established to support residential mortgage lending and related community investment endeavors. It was created through the Federal Home Loan Bank Act of 1932 during the Great Depression to bolster a collapsing residential mortgage market.
Primary Functions
- Liquidity Provision: The FHLB System provides short-term and long-term funding to member financial institutions to ensure liquidity.
- Affordable Housing Initiatives: It supports affordable housing and community development by offering a variety of loan and grant programs.
- Types of Advances: The FHLB offers several advance products, including fixed-rate, variable-rate, and community investment advances.
History
Origin and Development
The FHLB System was created by the Federal Home Loan Bank Act of 1932 during the dire financial straits of the Great Depression. It was designed primarily to provide liquidity and make homeownership more feasible for a greater portion of the U.S. population.
Major Milestones
- 1932: Establishment of the FHLB System.
- 1989: Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) — expanded the system’s lender membership.
- 2008: Housing and Economic Recovery Act (HERA) gave the Federal Housing Finance Agency (FHFA) greater regulatory oversight of the FHLBs.
Functions
Financial Support to Lenders
The FHLB System supports member banks by providing advances—a form of secured loan—which lenders use to provide mortgages to their customers.
Community and Affordable Housing Programs
- Affordable Housing Program (AHP): This program encourages the creation of affordable rental and homeownership opportunities for low-income households.
- Community Investment Program (CIP): Offers below-market rate loans for community development projects, including housing, economic development, and revitalization initiatives.
Risk Management
FHLBs provide a diversified funding source that helps member institutions manage interest rate risk, liquidity risk, and credit risk.
Applicability
Member Institutions
The FHLB System serves over 7,000 member institutions including community banks, thrifts, credit unions, and insurance companies, ensuring a broad-based impact on the financial market.
Impact on Homeownership
By providing liquidity to local lenders, the FHLB System indirectly supports millions of homeowners, contributing significantly to the economic and social stability of communities.
Comparisons
FHLB vs. Federal Reserve
While the Federal Reserve serves as the central bank for the United States, regulating monetary policy and providing liquidity through mechanisms like the discount window, the FHLB System specifically targets housing finance and local lender support.
FHLB vs. Fannie Mae and Freddie Mac
Unlike Fannie Mae and Freddie Mac, which buy and securitize mortgages, the FHLB System focuses on providing liquidity to banks through advances.
Related Terms
- Advance: A secured loan provided by FHLBs to member institutions.
- Collateral: Assets pledged by member institutions to secure an advance.
- Federal Housing Finance Agency (FHFA): The regulatory body overseeing the FHLBs.
FAQs
How are the FHLBs governed?
What types of collateral are accepted for advances?
How does the FHLB System impact everyday consumers?
References
- Federal Home Loan Bank Act of 1932
- Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)
- Housing and Economic Recovery Act (HERA)
- Federal Housing Finance Agency (FHFA) Official Documents
Summary
The Federal Home Loan Bank (FHLB) System is an integral component of the U.S. financial system, offering critical support to local lenders and indirectly benefiting millions of homeowners. Established during the Great Depression, its role has evolved to include comprehensive community development and affordable housing initiatives, ensuring a stable and accessible mortgage market for all.
