LOCs represent a promise, made at the request of a FHLBank member, to ensure payment to a third-party beneficiary if the member is unable to fulfill its obligations.
LOCs are used by FHLBank members to support their liquidity needs, asset-liability management, and housing, community, and economic development.
LOCs provide members with a means for guaranteeing contracts and obligations on behalf of themselves and their customers. LOCs are secured by the pledge of high-quality collateral such as single-family mortgages, mortgage-backed securities, and other collateral generally on equivalent terms to that required for advances.
LOCs are offered with a variety of terms, typically from as short as two weeks to up to 180 months.
They are used for a range of purposes, including to attract and retain public unit deposits (PUDs), support municipal financing and revenue bond financing for housing and infrastructure projects, and lower borrowing costs for community development activities.
PUDs allow FHLBank members of any size to attract deposits that are higher than FDIC insurance limits. State laws typically require financial institutions to collateralize deposits above the FDIC cap, and PUD eligibility often hinges on whether FHLBank letters of credit are permitted as acceptable collateral. Where allowed, FHLBank LOCs help members meet statutory collateral requirements, avoiding the need to pledge U.S. Treasuries or other comparably safe assets.
If an FHLBank is required to make payment under a letter of credit, the member either reimburses the FHLBank for the amount or, subject to the applicable FHLBank’s discretion, the pledged collateral is used to repay the LOC, or the LOC is converted into a collateralized advance to the member. However, standby letters of credit usually expire without being drawn upon.
On a consolidated basis, the FHLBank System had a total outstand LOC balance of just under $233 billion as of December 31, 2025.