Federal Home Loan Bank Advances
The Federal Home Loan Bank (FHLB) System was established in 1932, almost twenty years after the establishment of the Federal Reserve System in 1913. Among their responsibilities, both systems were tasked with extending loans to financial institutions. Historically, Federal Home Loan Banks interacted largely with savings and loans (S&Ls) and focused on supporting home financing. The Federal Reserve Banks, in contrast, historically interacted with commercial banks which focused on the financing needs of commerce, agriculture, and industry. The separate constituencies of the two systems have blurred with the evolution of the financial industry and financial regulation. In the 1950s and 1960s, S&Ls occasionally sought out the Federal Reserve as a lender of last resort when FHLB Banks were unable to satisfy their liquidity needs. With the widespread demise of S&Ls in the 1980s, the FHLB System significantly reoriented its lending toward commercial banks.
Origins of different systems
The basic structure of the Federal Reserve System, with twelve regional banks and a Washington-based board overseeing the banks, became a template for two subsequent pieces of legislation. The Federal Farm Loan Act of 1916 created a similar structure to serve the farm mortgage sector, and the Federal Home Loan Bank Act of 1932 again created a similar structure to serve the nonfarm home mortgage sector. Policymakers viewed these three systems as having broadly similar purposes, to provide centralized resources to the thousands of local lenders that comprised the American financial system. President Hoover, for example, described the FHLB System as a "necessary companion in our financial structure of the Federal Reserve Banks and our Federal Land Banks" (Hoover 1931).
Lobbying for a federal structure to support home mortgage lenders began after World War I when a burst of home financing demand tested the capacity of many lenders. The limited political power of home mortgage lenders in the United States at the time meant that no federal system was established until the exigencies of the Great Depression. In the meanwhile, several proposals surfaced. One suggestion had been for an institution that would buy and sell mortgages and issue mortgage-backed securities, akin to the Federal Land Banks in the farm mortgage sector and some European central mortgage banks. Another suggestion of some S&L leaders was to simply let their institutions join the Federal Reserve System (Bodfish and Theobald 1940 p. 287). Some S&L leaders proposed that "Building and loan associations should have a Federal Reserve System," using the pre-Depression "building and loan" terminology (Mason 2004 p. 77). Congress settled on a design for the FHLB System that would serve as a source of loans, but in contrast to the Federal Reserve System, the FHLB System would have greater powers to make longer-term loans.
The separation between the Federal Home Loan Bank System and the Federal Reserve System reflected the historic divisions between S&Ls and commercial banks. S&Ls focused on home mortgage loans while commercial banks focused on business lending, though they competed at times in raising funds from household savers. Amidst these divisions, S&L leaders had envied the Federal Reserve System in the 1920s (Boner p. 77), commercial banks later opposed the creation of the FHLB system (Ewalt 1962 p. 52), and leaders of the new FHLB System emphasized its differences from the Federal Reserve. For example, the original twelve Federal Home Loan Banks were deliberately placed in cities that did not have Federal Reserve Banks. FHL Banks in Evanston, Cambridge, and Newark avoided nearby financial centers of Chicago, Boston, and New York, though these awkwardly placed banks were eventually relocated (Theobald 1979 p. 35).
Lending to financial institutions
Because commercial banks and S&Ls had different liquidity needs, Congress set up the Federal Reserve and Federal Home Loan Bank systems with different lending powers. Commercial banks have had significant short-term liquidity needs from demand deposits and lines of credit to businesses. As a result, Federal Reserve powers concentrated largely on short-term lending, such as 120 days or less. Often, the Federal Reserve's loans have been just for a day or two. Further, Federal Reserve Banks when first established could not take mortgages as collateral, consistent with nationally chartered commercial banks' very restricted powers to hold mortgage loans. In contrast, FHL Banks have greater powers to offer longer-term loans and to act as a supplementary source of funding, consistent with the long-term nature of mortgage lending. FHL Banks have commonly offered loans of at least one year in length historically, and at times FHL Banks have offered much longer terms such as 10-year loans in the 1950s and 30-year loans today.
Both systems were intended to address emergency funding needs. For example, the FHL Banks were meant to fill a gap for mortgage lenders that "never had a place to go for emergency accommodations or for long-time funds" (United States Senate 1932 p. 4). In practice, however, FHL Banks have tended to face limitations in meeting emergency needs. FHL Banks can make loans to members only if they can raise funds through debt issuance, and sometimes their ability to issue additional debt has been limited during times of financial market stress. For example, in 1955, tight money market conditions put "pressure upon the Federal Home Loan Banks" and led the Federal Home Loan Bank Board to announce a temporary policy limiting the availability of FHL Bank advances (McAllister 1955 p. 52). In 1966, S&Ls faced an even more serious shortage in funding amidst a rise in competition for savings deposits. The competition for funding also affected FHL Banks, which had trouble raising funds "at any price" and again restricted the availability of advances (Grebler and Doyel 1969 p. 1329).
In contrast, the ability of Federal Reserve Banks to issue loans is unaffected by market conditions because, as the central bank, the Federal Reserve issues money rather than debt instruments. As a result, in episodes when the FHL Banks have faced limits, the Federal Reserve was able to continue to offer loans. In 1966, for example, the Board of Governors of the Federal Reserve System invoked emergency authority to permit Federal Reserve Banks to make loans to S&Ls if needed, though in the end no loans were made (Board of Governors 1966 p. 91).
Recognition of these basic differences between the funding capacities of the Federal Reserve and FHLB Systems led Congress to establish authority for the Federal Reserve to purchase FHL Bank debt in 1966. Some congressional leaders unsuccessfully floated the idea of mandating the Federal Reserve to purchase FHLB debt if needed (Marvell 1969 p. 64). Looking back on this history, former Federal Reserve Governor Daniel Tarullo, among others, has argued that the Federal Reserve's ability to purchase FHLB debt has contributed to a market perception of an implicit U.S. government guarantee of that debt (Gissler, Narajabad, and Tarullo 2022 p. 15).
Overlapping lending functions
S&Ls were the near-exclusive focus of the FHLB System until the 1980s. Savings banks and life insurance companies were also eligible for FHLB membership because of their significant mortgage lending activities. However, few joined the system in its first several decades, in part because few had experienced serious difficulties during the Great Depression. S&Ls were more interested in membership because of their greater liquidity needs and because their Depression experiences had been far more severe, with widespread liquidity shortages that limited their ability to pay out withdrawals or to fund new loans.
During the 1980s, the walls separating the financial institutions served by the FHLB and Federal Reserve Systems came down. The widespread failure of S&Ls decimated the membership base of the Federal Home Loan Bank System, leading Congress to open up FHLB membership more widely in 1989, including commercial banks if they held at least 10 percent of their assets in residential mortgage loans. Commercial banks have comprised the majority of FHLB members since the mid-1990s. Meanwhile, access to the Federal Reserve was also broadened by the Monetary Control Act of 1980. One goal of that act was to restructure the Federal Reserve's payment services by extending access to any depository institution, including savings and loans, that had taken up new powers to offer demand deposits. That act similarly opened up access to the Federal Reserve's discount window. Given these regulatory changes, the lending functions of the two systems have increasingly overlapped since the 1980s.
In 1981, for example, the FHLB Board anticipated that FHL Banks would not be able to meet the funding needs of S&Ls amidst the severe crisis S&Ls faced. The FHLB Board announced a policy to "encourage the Federal Reserve System to supplement its own efforts in funding [FHLB] members' liquidity needs." The Federal Reserve, using its new authority under the Monetary Control Act to lend to S&Ls, coordinated with the FHLB Board to establish a new borrowing rate designed for banks and S&Ls under "extended liquidity pressure" (Federal Reserve Bank of New York 1981).
More recently, episodes of severe financial markets stress in 2008 and 2020 featured extensive lending by both FHL Banks and Federal Reserve Banks to commercial banks. Often banks have turned first to FHLB loans when FHL Banks offered a lower cost of borrowing than the Federal Reserve Banks. In both episodes, the FHL Banks eventually faced problems accessing debt markets while the Federal Reserve was able to continue lending (Gissler, Narajabad, Tarullo 2022).
If a commercial bank borrows from an FHL Bank and then later seeks a loan from a Federal Reserve Bank, it may need to transfer collateral from the FHL Bank to the Federal Reserve Bank. Freeing up collateral can be difficult, for example, if an FHL Bank has a blanket lien on all a bank's assets, which is a common practice. This collateral transfer issue rose in 2023 when Silicon Valley Bank sought discount window loans but was not able to move collateral quickly enough from the FHL Bank of San Francisco (Board of Governors 2023, p. 60). In response, the Federal Housing Finance Agency, which regulates the FHL Banks, announced that it was working with FHL Banks to establish "the necessary expectations and infrastructure to transition members from their FHL Bank to the Federal Reserve discount window when necessary." The Federal Housing Finance Agency also stated that "the FHLBanks are not designed or equipped to take on the function of the lender of last resort."
Conclusion
Since 1932 the FHLB System has served as a supplementary source of funds for mortgage lenders. As a source of emergency funding it has been described as a "lender of next-to-last-resort," next to the Federal Reserve, because the FHLB System's ability to extend credit has historically faced limits amidst severe financial market conditions (Ashcraft, Bech, Frame 2008). Episodes of limitations on FHLB funding capacity date back at least to the 1950s and 1960s involving S&L liquidity needs. Since the widespread demise of S&Ls in the 1980s, FHL Banks have engaged in substantial lending to commercial banks. FHLB lending to commercial banks has created an important need for coordination with Federal Reserve Banks to ensure commercial banks can adequately access Federal Reserve loan facilities if FHLB facilities are insufficient for emergency needs.
References
Ashcraft, Adam B., Morten L. Bech, and W. Scott Frame. "The Federal Home Loan Bank System: The Lender of Next-to-Last Resort?" Federal Reserve Bank of New York Staff Report no. 357, November 2008. Available on FRASER
Board of Governors of the Federal Reserve System. "Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank," April 28, 2023. Available online
Bodfish, Morton and A. D. Theobald. Savings and Loan Principles. Prentice Hall, 1940.
Boner, J. Russell. "Background, Extent, and Consequences of "Federalization" of Savings and Loan Associations." Ph.D. Dissertation, University of Illinois, 1942.
Ewalt, Josephine Hedges. The Savings and Loan Industry, 1930-1960; a Business Reborn. American Savings and Loan Institute Press, 1962. Available online
Federal Home Loan Banks. The Federal Home Loan Bank System, 1932-1952, 1952. Available on FRASER
Federal Housing Finance Agency. "FHLBank System at 100: Focusing on the Future," 2023. Available online
Federal Reserve Bank of New York. (1981) "Discount Rates," Federal Reserve Bank of New York Circulars, August 21, 1981. Available on FRASER
Gissler, Stefan, Borghan Narajabad, and Daniel K. Tarullo. "Federal Home Loan Banks and Financial Stability." June 13, 2022. Available online
Grebler, Leo and Tom Doyel. "Effect of Industry Structure and Government Policies On Housing Demand And Cyclical Stability: Study of 1966 Experience." Volume Three of the Study of the Savings and Loan Industry, Directed by Irwin Friend, 1969. Available on FRASER
Hoover, Herbert. State of the Union Address, (1931). Available online
Marvell, Thomas B. The Federal Home Loan Bank Board. Frederick A. Praeger, 1969.
Mason, David L. From Building and Loans to Bail-outs: A History of the American Savings and Loan Industry, 1831-1995. Cambridge University Press, 2004.
McAllister, Walter W. Testimony. "Mortgage Market Problems, Hearings Before a Subcommittee of the Committee on Banking and Currency, United States Senate," 1955. Available on FRASER
Theobald, A. D. Forty-five Years on the Up Escalator, 1979.
United States Savings and Loan League. "Report of the Special Committee to Study The Federal Home Loan Bank System," 1956.
United States Senate, Committee on Banking and Currency. Report No. 837, to accompany S. 2959, Creation of Federal Home-Loan Banks. June 15, 1932. Available on FRASER
Published October 15, 2024. Jonathan Rose contributed to this article. Please cite this essay as: Federal Reserve History. "Federal Home Loan Bank Advances." October 15, 2024. See disclaimer and update policy.
