The Role of Federal Home Loan Banks in the Financial System

In 1932, lawmakers created a system of Federal Home Loan Banks (FHLBs) as a government-sponsored enterprise (GSE) to support mortgage lending by the banks’ member institutions. The 11 regional FHLBs raise funds by issuing debt and then lend those funds in the form of advances (collateralized loans) to their members—commercial banks, credit unions, insurance companies, and community development financial institutions.

In addition to supporting mortgage lending, FHLBs provide a key source of liquidity, during periods of financial stress, to members that are depository institutions. During such periods, advances can go to institutions with little mortgage lending. Some of those institutions have subsequently failed, but the FHLBs did not bear any of the losses.

FHLBs receive subsidies from two sources because of their GSE status:

• The perception that the federal government backs their debt, often referred to as an implied guarantee, which enhances the perceived credit quality of that debt and thereby reduces FHLBs’ borrowing costs; and
• Regulatory and income tax exemptions that reduce their operating costs.

Federal subsidies to FHLBs are not explicitly appropriated by the Congress in legislation, nor do they appear in the federal budget as outlays. The Congressional Budget Office estimates that in fiscal year 2024, the net government subsidy to the FHLB system will amount to $6.9 billion (the central estimate, with a plausible range of about $5.3 billion to $8.5 billion). That subsidy is net of the FHLBs’ required payments, totaling 10 percent of their net income, to member institutions for affordable housing programs. CBO estimates that in fiscal year 2024, such payments will amount to $350 million.

Because members are both owners and customers of FHLBs, almost all of the subsidy (after affordable housing payments are deducted) probably passes through to them, either in the form of low-cost advances or, to a lesser extent, through dividends. FHLBs’ advances may therefore lead to lower interest rates for borrowers on loans made by member institutions, including lower interest rates on single-family residential mortgages. That effect on rates is difficult to quantify because members can use the advances to fund any type of loan or investment.