A recent paper titled “America’s “Other” GSE Problem: The Federal Home Loan Banks, Part I,” published by the R Street Institute, argues that the FHLBanks undermine market discipline and represent little more than “the federal government’s interference in financial markets.” This gross mischaracterization overlooks the fact that the FHLBanks’ stable, low-cost liquidity strengthens thousands of community lenders and helps contain financial contagion during times of market stress — striking an effective balance between market discipline and the need to avoid an overly intrusive government presence in the financial system.
The FHLBanks have operated efficiently for nearly 100 years as private sector, member-owned cooperative financial intermediaries — receiving no federal funding — that deliver critical liquidity by connecting capital markets to thousands of local lenders across the country.
The paper claims that FHLBank lending to Silicon Valley Bank prior to its March 2023 failure indicates the FHLBanks’ “tendency to extend credit to financially struggling or insolvent institutions.” This is a very selective, partial recollection of that time period that fails to recognize the more than 3,600 FHLBank members that utilized FHLBank liquidity to navigate the unprecedented bank runs in 2023 and continue to serve their customers today. It is also a blatant disregard for one of the foundational purposes of the FHLBank System – to relieve financial strains on lenders. To paraphrase Federal Reserve Governor Michelle Bowman’s testimony on June 6th, the goal of a well-functioning, regulated banking system is not to eliminate the risk of bank failure but to ensure that bank failure does not destabilize the banking system.
In a capitalist economy, entrepreneurs invest in companies. Some are successful and some fail. While it is not the role of the FHLBanks to prevent failures, they have consistently delivered on their mission of providing reliable liquidity to their members, in all economic environments, including in March 2023 and previous periods of market stress. The end result each time has been an injection of reassurance and the return of confidence and stability to member institutions and the U.S. financial system. This is precisely what Congress intended when it created the FHLBank System in 1932.
The R Street paper also claims the FHLBanks increase moral hazard risk, represent an erosion of market discipline, and lack transparency and accountability. Again, these criticisms disregard the facts. The FHLBanks are self-capitalizing, receive no federal funding, put member capital in the first loss position, and all FHLBank liquidity is fully collateralized. The FHLBanks’ liquidity mission and their support for housing have long been linked through their collateral practices. As detailed in the System’s 2024 Combined Financial Report, over 96.7% of pledged collateral is backed by single-family home loans and other real estate–backed assets, with total outstanding advances amounting to just 20% of total pledged collateral — meaning the System was providing liquidity in a safe and sound manner with $5 in collateral for every $1 of advances.
As financial intermediaries linking capital markets to local lenders, the FHLBanks are subject to the daily scrutiny and discipline of capital market investors. Further, the FHLBank System includes 11 independent FHLBanks, each owned by their members and operated by an executive team with oversight from a board of directors. In addition, federal statute holds each FHLBank jointly and severally liable for the obligations of the others, creating strong incentives for mutual oversight and prudent risk management across the System. Each FHLBank submits quarterly SEC filings and is subject to FHFA supervision and regulatory oversight. Day in and day out, the FHLBanks are accountable to their nearly 6,500 member institutions, to their boards of directors, to their communities, to capital markets, to their regulator, and to federal laws and regulations as they fulfill their mission to deliver affordable funding to their members, most of which are small community and rural lenders who gain access to capital markets and capacity to lend and serve their communities through all economic cycles.
The safeguards built into the FHLBank System were designed to ensure safe and sound operations. Restricting access to FHLBank liquidity in the name of strict market discipline overlooks the increased risks that would pose to FHLBank members, the broader financial system, and the U.S. economy. Without access to FHLBank liquidity, even well-capitalized institutions could encounter funding pressures during periods of stress, heightening the risk of avoidable failures and financial contagion. This could force abrupt deleveraging and fire sales, deepening economic downturns. Market discipline is an important feature of our financial system but so is protecting against systemic risk — R Street overlooks the intentional creation of the FHLBanks to strike the right balance between these two forces.
Just as FDIC insurance and the Federal Reserve’s discount window provide critical backstops to protect depositors and maintain confidence in the banking system, FHLBank liquidity ensures that member institutions have access to funding when and where it is needed to serve their customers and communities in all economic conditions. The FHLBanks do not pick winners or dictate lending decisions; instead, they level the playing field and support economic growth with reliable liquidity to all members with adequate collateral so that no creditworthy project or borrower is unsupported due to funding constraints.
As households, companies, and financial institutions navigate the 2025 economic landscape, the FHLBank System remains a vital, century‑old economic stabilizer, delivering wholesale liquidity to community lenders nationwide, funding that is particularly important in rural and underserved areas. Hallmarks of the System include deep relationships with members, strengthening the capacity and responsiveness of members, robust multi-level market discipline mechanisms, oversight by the FHFA, and a financial system that is more resilient due to the complementary liquidity provided by the FHLBanks and the Federal Reserve.
R Street clearly misunderstood the critical liquidity role of the FHLBanks. Hopefully, R Street’s anticipated Part II reflects a more thorough analysis that acknowledges the FHLBank System’s unique value as a network of privately capitalized, member-owned cooperatives providing low-cost, dependable liquidity to community lenders and operating with strong risk management and market discipline. As the FHLBank System nears its 100th year of delivering mission-driven liquidity, without ever incurring a loss on an advance, the Federal Home Loan Banks truly are “The GSE Solution.”
