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This podcast provides you the ability to listen to new regulatory guidance issued by the National Credit Union Administration, and occasionally the F D I C, the O C C, the F F I E C, or the C F P B. We will focus on new and material agency guidance, and historically important and still active guidance from past years that NCUA cites in examinations or conversations. This podcast is educational only and is not legal advice. We are sponsored by Credit Union Exam Solutions Incorporated. We also have another podcast called With Flying Colors where we provide tips for achieving success with the N C U A examination process and discuss hot topics that impact your credit union.
Samantha: Hello, this is Samantha Shares.
This episode covers the G A O report
on the Federal Home Loan Banks: Role
During Financial Stress and Membersâ
Borrowing Trends and Outcomes.
The following is an audio
version of that document.
This podcast is educational
and is not legal advice.
We are sponsored by Credit Union
Exam Solutions Incorporated, whose
team has over two hundred and
forty years of National Credit
Union Administration experience.
We assist our clients with N C
U A so they save time and money.
If you are worried about a recent,
upcoming, or in process N C U A
examination, reach out to learn how they
can assist at Mark Treichel dot com.
Also check out our other podcast called
With Flying Colors where we provide tips
on how to achieve success with N C U A.
And now the document.
Hello, and welcome back.
Iâm Samantha Shares.
Today, weâre going to take a deeper,
slower, and more deliberate look at the
Federal Home Loan Bank system, and what
the data actually show about its role
during periods of financial stress.
In December of twenty twenty-five, the
Government Accountability Office â the
G A O â released a comprehensive
report on the Federal Home Loan Banks,
often referred to as the F H L Banks.
This report examined how the system
functioned during some of the most
turbulent moments in recent banking
history, including the early stages
of the C O V I D nineteen pandemic and
the banking stress that followed the
failures of several large institutions
in March of twenty twenty-three.
This matters because the Federal Home
Loan Bank system is often discussed
in headlines, hearings, and academic
papers, but rarely examined in a way
that separates perception from evidence.
The G A O did exactly that.
The immediate reason for this
review was the failure of Silicon
Valley Bank and Signature Bank.
In the weeks leading up to their collapse,
both banks had borrowed heavily from
their regional Federal Home Loan Banks.
At the same time, total advances
outstanding across the F H L Bank
system surged to nearly one trillion
dollars, a level never before seen.
That raised a familiar
and serious concern.
Were the Federal Home Loan Banks quietly
propping up troubled institutions?
And if so, were they increasing
risk to the broader financial
system and to the Federal Deposit
Insurance Corporation, or F D I C?
Rather than speculate, the
G A O examined the data.
And not just a snapshot.
The G A O analyzed more than ten
years of information, including call
report data, borrowing patterns,
lending outcomes, safety and soundness
indicators, and bank failures.
Before we get into what the G A O found,
itâs important to understand what the
Federal Home Loan Bank system actually is.
The system consists of eleven
regional cooperative banks.
These banks are owned by their
members, not by the federal government.
Those members include community banks,
regional banks, large banks, credit
unions, insurance companies, and community
development financial institutions.
As of mid twenty twenty-five,
roughly ninety-three percent of
banks in the United States were
members of a Federal Home Loan Bank.
The primary service the system provides
is liquidity, delivered through
secured loans known as advances.
These advances are fully collateralized.
Members must pledge eligible collateral,
such as mortgage loans or government
securities, and conservative haircuts
are applied to protect against loss.
Advances are available in a wide
range of maturities, from overnight
funding to longer-term structures.
And importantly, borrowing from a Federal
Home Loan Bank is considered a normal
part of day-to-day liquidity management.
Unlike borrowing from the Federal
Reserveâs discount window,
there is no stigma attached.
One of the most striking findings in the
G A O report is that most banks behaved
in a remarkably consistent way over time.
From twenty fifteen through mid
twenty twenty-five, the vast
majority of banks borrowed from their
Federal Home Loan Bank regularly.
More importantly, they kept their
level of borrowing within a stable
range relative to their total assets.
The G A O summarized this clearly,
stating that most banks maintained
relatively consistent reliance on
Federal Home Loan Bank advances,
even during periods of stress.
At the median level, Federal Home Loan
Bank borrowing typically represented
zero to five percent of total assets.
That was true in calm periods, and
it was also true during the onset
of the pandemic and during the March
twenty twenty-three banking turmoil.
This finding matters because it directly
challenges the idea that banks suddenly
become dependent on Federal Home Loan
Bank funding when conditions deteriorate.
For most institutions,
that simply did not happen.
So why did total system-wide
borrowing spike so dramatically?
The answer is both simple and precise.
A very small number of large banks
drove nearly all of the increase.
During the first quarter of twenty
twenty-three, banks with more than ten
billion dollars in assets accounted for
ninety-seven percent of the increase in
total Federal Home Loan Bank borrowing.
Even though these large banks
represented only a small fraction
of total institutions, they held the
majority of outstanding advances.
And even then, for most of those
banks, the increases in borrowing
still represented a relatively
small share of total assets.
The G A O also explored why
banks use Federal Home Loan Bank
advances in the first place.
Executives across asset sizes and
regions cited several consistent reasons.
First, speed and certainty.
Funds can often be accessed
the same business day.
Second, flexibility.
Advances are available across
a wide range of maturities.
Third, cost.
Advances are competitively priced,
and members receive dividends on
Federal Home Loan Bank stock, which
can reduce effective borrowing costs.
And fourth, the absence of stigma.
Because Federal Home Loan Bank borrowing
is part of normal operations, using it
during stress does not signal weakness.
The most important question, however,
is what happens after banks borrow.
To answer that, the G A O used
econometric models that controlled
for bank health, macroeconomic
conditions, and business cycles.
For banks with ten billion dollars or
less in assets, higher Federal Home
Loan Bank borrowing was generally
associated with positive outcomes.
These banks tended to lend more
overall, including more residential
and commercial real estate lending,
and modest increases in consumer
lending during periods of stress.
The G A O found that higher Federal
Home Loan Bank borrowing was also
associated with a lower likelihood
of appearing on the F D I Câs Problem
Bank List and a lower likelihood of
failure or voluntary liquidation.
The G A O stated clearly that it found
no evidence that higher Federal Home
Loan Bank borrowing was associated with
increased safety and soundness risk.
For smaller banks, the relationship
often ran in the opposite direction.
The report does not ignore the
failures of March twenty twenty-three.
But it places them in context.
Among the banks that significantly
increased reliance on Federal Home Loan
Bank advances ahead of that period,
one failed, while others reduced
borrowing quickly and stabilized.
Regulators told the G A O that they
do not view Federal Home Loan Bank
borrowing by itself as a red flag.
Instead, they focus on sudden deviations
from a bankâs normal funding patterns.
The G A O also reviewed policy
proposals aimed at reforming the
Federal Home Loan Bank system.
While some proposals could address
specific concerns, the G A O
concluded that each carried meaningful
tradeoffs, particularly for smaller
institutions and housing markets.
In several cases, proposed changes
would duplicate existing oversight
or unintentionally restrict
liquidity when it is most needed.
One area where the G A O did
identify room for improvement was
coordination between Federal Home
Loan Banks and Federal Reserve Banks.
Following the March twenty twenty-three
stress period, joint exercises began, and
a formal working group was established
in January of twenty twenty-five.
These efforts are ongoing and are
intended to improve readiness for
future periods of financial stress.
So whatâs the takeaway?
The Federal Home Loan Bank system
largely functioned as designed.
It provided liquidity without panic,
supported lending, and contributed
to stability, especially for
community-focused institutions.
The data do not support the idea
that Federal Home Loan Banks
broadly increase systemic risk.
Instead, the evidence suggests that
when used consistently and prudently,
Federal Home Loan Bank advances
can serve as a stabilizing force
rather than a hidden liability.
This concludes the document.
If your credit union could use assistance
with your exam, reach out to Mark Treichel
on LinkedIn or at Mark Treichel dot com.
This is Samantha Shares, and
we thank you for listening.