What Is the Federal Home Loan Bank (FHLB) System?

The Federal Home Loan Bank (FHLB) System is a government-sponsored enterprise that makes sure there is plenty of capital available for qualified home mortgage loans. It’s a group of 11 banks that function both separately and as a unit to reliably and securely provide lending capital to thousands of member financial institutions.

Definition and Examples of the Federal Home Loan Bank System

Established in 1932 in the wake of the Great Depression and overseen by the Federal Housing Finance Agency (FHFA), the Federal Home Loan Bank (FHLB) System includes 11 banks in major cities around the U.S. About 80% of lending institutions in the U.S. rely on the FHLB System.

• Acronym: FHLB, FHLBanks

Each FHLB lends to member financial institutions that issue real estate loans. By having this regional bank to borrow from at a low cost, the member institutions can make more low-cost mortgage loans to customers than they could without this source of financing. In return, and as a condition of their membership, the institutions purchase stock in the bank in their region.

These “banks for the banks” are government-sponsored enterprises, like Fannie Mae and Freddie Mac. But unlike those entities, the FHLB System is not guaranteeing or insuring mortgage loans. It focuses instead on keeping a low-cost source of capital for banks and credit unions so they can keep issuing mortgage loans and don’t experience cash flow issues.

For example, if a local credit union in Indiana buys stock in the FHLB of Indianapolis and they later experience a higher-than-average volume of mortgage applications from qualified applicants, they can request an “advance” from the FHLB (a kind of loan). They’ll receive an interest rate low enough that they can still cover their costs for these mortgage loans, keeping themselves in business while offering more mortgages to qualified applicants. The credit union then uses its residential mortgages as a form of collateral for the advance.

How the Federal Home Loan Bank System Works

The FHLB System manages to stay independent from tax money through the stocks the member institutions buy. These banks also issue a kind of debt security called a “consolidated obligation” in capital markets. These debt programs generate revenue to keep the FHLB System running.

The banks are located in Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, and Topeka. While they are each separate entities with boards of directors, they work as a system to issue their consolidated obligations.

A big part of why these banks are particularly helpful is that they make it possible for banks to provide loans to underserved populations they might not otherwise have financial incentive to serve. Both the Federal Home Loan Banks themselves and the FHFA more broadly see greater access to mortgage capital as connected to increasing homeownership for people who have been underserved with mortgage loans in the past.

Benefits and Cautions of the FHLB System

The FHLB System has been around since 1932. Its consolidated obligations consist of bonds and discount notes, which are generally seen as safer investments. During the housing crisis of 2008, mortgage-related government-sponsored enterprises Fannie Mae and Freddie Mac had to be protected with a conservatorship that used taxpayer money to cover their losses. Because of the way the FHLB System is funded, it was shielded from some of the harshest effects of the 2008 recession. This allowed the system to continue without needing government assistance.

That being said, when financial institutions start using the FHLB System more or focusing on particular kinds of advances, economists evaluate whether the banks are becoming more vulnerable to market shocks.

For instance, there used to be another FHLB in Seattle, but the bank couldn’t recover from the financial crisis. In 2015, the decision was made to merge Seattle with the Des Moines FHLB. While this resolution seems to have been effective, economists and government agencies like the FHFA keep track of how the banks are lending because the failure of multiple Federal Home Loan Banks would have major effects on the economy.