Safety & Soundness
To become a member of a FHLBank, a financial institution must apply for membership and purchase stock in the FHLBank. Each applicant for membership undergoes a thorough financial review and the FHLBanks employ an integrated approach to assessing the ongoing creditworthiness of their members, relying on call reports, financial data, reports of examination, and other qualitative information. Additionally, FHLBanks may impose borrowing limits on individual members to reduce credit exposure to a member that is experiencing financial difficulty.
To borrow from their FHLBank, members must purchase additional activity-based stock and, by law, must pledge mission-related collateral as security. This includes mortgages, mortgage-backed securities, loans and securities issued by the United States government, securities issued by any U.S. agency, cash or deposits at the FHLBank, and other collateral that is real estate related. Community financial institution members may also pledge small business loans, small farm loans, small agribusiness loans, and community development loans as collateral.
Every loan made by a FHLBank must be fully collateralized, and collateral is subject to regular reviews and valuations. Securities are repriced daily while market values for HELOCs and home equity loans are posted monthly, and market values for commercial, multifamily, and farmland portfolios are posted quarterly. The FHLBanks can also demand additional or substitute collateral during the life of a given advance (loan).
In the case of a member experiencing a period of financial stress, an FHLBank can only lend to that member with the consent of the member’s primary financial regulator.
By law, the FHLBanks are also required to obtain a perfected security interest on all advances to members, giving them priority over other lien creditors in the case of a member failure.
The FHLBanks have never incurred a loss on an advance in their more than nine decades of existence.
The 11 FHLBanks are jointly and severally liable for every bond issued by the Office of Finance, meaning each FHLBank bears responsibility for paying the debts of the entire FHLBank System. If a single FHLBank is unable to contribute to a debt payment, the other 10 FHLBanks would be responsible for paying the debt in full. Joint and several liability enhances the safety and soundness of the FHLBank System and gives investors confidence that FHLBank System debt will be repaid.
FHLBank investments are also very safe. By regulation, they are prohibited from purchasing non-investment grade securities and nearly all of their investments are triple-A rated.
Each bank is registered with the SEC and is supervised and regulated by the Federal Housing Finance Agency (FHFA).