In the wake of recent banking sector volatility, the Urban Institute recently published a compelling paper “In Defense of the Federal Home Loan Banks” authored by Jim Parrott and Mark Zandi. The piece highlights the essential value the 11 regional Federal Home Loan Banks (FHLBanks) bring to the economy, particularly in times of market instability.
The paper underscores the value of the FHLBanks to mortgage lending, citing a recent University of Wisconsin study which notes that financial institution membership in an FHLBank “reduces mortgage rates by 18 basis points and increases mortgage lending by more than 16%.”¹
More importantly, as demonstrated during the March banking crisis, the FHLBanks serve an important stabilizing role for their members during times of market disruption. The paper notes that “[t]he FHLBs provide a durable and consistent source of liquidity, without which the cost of funding for many lenders would become prohibitively expensive during times of stress.”² The authors further note that while FHLBank membership is valued by institutions of all sizes, smaller institutions that have fewer sources of liquidity at their disposal, like credit unions and community banks, benefit greatly from membership. The authors further remark that, “without the FHLB system it is likely the banking system would be substantially more concentrated, as smaller institutions would not have the ability to navigate periods of stress and the loss of liquidity.”³
Parrott and Zandi also emphasize the benefit of the FHLBanks to the overall economy, stating that:
This stabilizing role has been critical several times in recent memory alone, as alternative sources of capital fled the system, and the Fed was yet to step in as the lender of last resort. Without the FHLBs, these downturns in the economic cycle would have been significantly more painful, with greater swings in the cost and availability of credit, exacting greater damage on the economy.⁴
The ability of the FHLBanks to meet members’ liquidity needs quickly and effectively during times of market stress gives the Fed and policymakers time to craft an appropriate response, knowing the FHLBanks offer a solid first line of defense.
Ultimately, the authors offer a strong endorsement for the stabilizing force of the FHLBank System and highlights how its diversity of membership, collateral practices, and cooperative structure minimize risk not only for the individual FHLBanks, but also for taxpayers. Access the full paper here.
¹Urban Institute Report, “In Defense of the Federal Home Loan Banks,” Page 4
² Urban Institute Report, “In Defense of the Federal Home Loan Banks,” Page 5
³ Urban Institute Report, “In Defense of the Federal Home Loan Banks,” Page 5
⁴Urban Institute Report, “In Defense of the Federal Home Loan Banks,” Page 5
