FHLB: The banking backstop you’ve never heard of

After the fall of Silicon Valley Bank, other midsize banks needed cash, fast. They wanted to be sure they had all the money they needed if their depositors got nervous and demanded their money. Some of these banks turned to Federal Home Loan Banks, a sort of bank co-op regulated by the federal government.   

Picture this: It’s 1932. The housing market has been devastated by the Great Depression, so Congress creates the Federal Home Loan Bank System to give mortgage lending a boost.

The system consists of 11 regional banks and works like a co-op, according to Janneke Ratcliffe at the Urban Institute. Owned by local private banks, the member banks can get low-interest loans from their local Federal Home Loan Banks.

“They act as shock absorbers to prevent another total collapse of the banking and financial system since that we experienced in the Great Depression,” Ratcliffe said.

Most recently, Federal Home Loan Banks helped their local bankers absorb the shock of the collapse of Silicon Valley Bank.

“The home loan banks are doing exactly what they were set up to do,” said Jaret Seiberg, an analyst at TD Cowen Washington Research Group.

After the collapse of SVB, Seiberg said more mid-sized banks turned to Federal Home Loan Banks.

“They’re providing liquidity to the banking system. But their original mission focused on home loans — it’s even in their name,” he said.

The federal government regulates and informally backs Federal Home Loan Banks; they’re exempt from most taxes. In return, they have to dedicate at least 10% of their earnings to affordable housing, through things like grants to developers building affordable homes.

Advocates like Sarah Brown, head of Mountain State Justice in West Virginia, want to up that to 20%.

That would be “a way to use this federal system to get the most benefit to people who are really struggling to be able to afford good quality housing,” she said.

We wanted to see what the Federal Home Loan Banks thought of that idea, so we reached out to them but didn’t hear back by deadline.