WEBVTT NOTE This file was generated by Descript 00:00:00.469 --> 00:00:02.420 Samantha: Hello, this is Samantha Shares. 00:00:03.099 --> 00:00:07.820 This episode covers the G A O report on the Federal Home Loan Banks: Role 00:00:07.820 --> 00:00:11.329 During Financial Stress and Members’ Borrowing Trends and Outcomes. 00:00:11.981 --> 00:00:14.551 The following is an audio version of that document. 00:00:15.141 --> 00:00:18.321 This podcast is educational and is not legal advice. 00:00:18.811 --> 00:00:22.761 We are sponsored by Credit Union Exam Solutions Incorporated, whose 00:00:22.761 --> 00:00:25.841 team has over two hundred and forty years of National Credit 00:00:25.841 --> 00:00:27.731 Union Administration experience. 00:00:28.281 --> 00:00:31.871 We assist our clients with N C U A so they save time and money. 00:00:32.261 --> 00:00:36.321 If you are worried about a recent, upcoming, or in process N C U A 00:00:36.321 --> 00:00:40.641 examination, reach out to learn how they can assist at Mark Treichel dot com. 00:00:41.191 --> 00:00:45.521 Also check out our other podcast called With Flying Colors where we provide tips 00:00:45.521 --> 00:00:48.091 on how to achieve success with N C U A. 00:00:48.828 --> 00:00:49.848 And now the document. 00:00:50.658 --> 00:00:52.098 Hello, and welcome back. 00:00:52.834 --> 00:00:54.024 I’m Samantha Shares. 00:00:54.718 --> 00:00:58.348 Today, we’re going to take a deeper, slower, and more deliberate look at the 00:00:58.348 --> 00:01:02.858 Federal Home Loan Bank system, and what the data actually show about its role 00:01:02.858 --> 00:01:04.848 during periods of financial stress. 00:01:05.513 --> 00:01:09.033 In December of twenty twenty-five, the Government Accountability Office — the 00:01:09.033 --> 00:01:13.063 G A O — released a comprehensive report on the Federal Home Loan Banks, 00:01:13.273 --> 00:01:15.913 often referred to as the F H L Banks. 00:01:16.593 --> 00:01:19.863 This report examined how the system functioned during some of the most 00:01:19.863 --> 00:01:23.953 turbulent moments in recent banking history, including the early stages 00:01:23.953 --> 00:01:28.273 of the C O V I D nineteen pandemic and the banking stress that followed the 00:01:28.273 --> 00:01:31.973 failures of several large institutions in March of twenty twenty-three. 00:01:32.707 --> 00:01:36.647 This matters because the Federal Home Loan Bank system is often discussed 00:01:36.647 --> 00:01:41.207 in headlines, hearings, and academic papers, but rarely examined in a way 00:01:41.207 --> 00:01:43.327 that separates perception from evidence. 00:01:43.992 --> 00:01:45.682 The G A O did exactly that. 00:01:46.498 --> 00:01:49.588 The immediate reason for this review was the failure of Silicon 00:01:49.588 --> 00:01:51.378 Valley Bank and Signature Bank. 00:01:51.968 --> 00:01:55.788 In the weeks leading up to their collapse, both banks had borrowed heavily from 00:01:55.788 --> 00:01:57.948 their regional Federal Home Loan Banks. 00:01:58.627 --> 00:02:02.777 At the same time, total advances outstanding across the F H L Bank 00:02:02.777 --> 00:02:07.067 system surged to nearly one trillion dollars, a level never before seen. 00:02:07.814 --> 00:02:10.194 That raised a familiar and serious concern. 00:02:10.934 --> 00:02:14.894 Were the Federal Home Loan Banks quietly propping up troubled institutions? 00:02:15.510 --> 00:02:18.570 And if so, were they increasing risk to the broader financial 00:02:18.570 --> 00:02:23.280 system and to the Federal Deposit Insurance Corporation, or F D I C? 00:02:23.916 --> 00:02:26.886 Rather than speculate, the G A O examined the data. 00:02:27.641 --> 00:02:28.911 And not just a snapshot. 00:02:29.689 --> 00:02:33.729 The G A O analyzed more than ten years of information, including call 00:02:33.729 --> 00:02:38.129 report data, borrowing patterns, lending outcomes, safety and soundness 00:02:38.129 --> 00:02:40.119 indicators, and bank failures. 00:02:40.821 --> 00:02:44.861 Before we get into what the G A O found, it’s important to understand what the 00:02:44.861 --> 00:02:47.551 Federal Home Loan Bank system actually is. 00:02:48.277 --> 00:02:51.287 The system consists of eleven regional cooperative banks. 00:02:51.857 --> 00:02:55.117 These banks are owned by their members, not by the federal government. 00:02:55.879 --> 00:03:00.139 Those members include community banks, regional banks, large banks, credit 00:03:00.139 --> 00:03:04.659 unions, insurance companies, and community development financial institutions. 00:03:05.338 --> 00:03:08.408 As of mid twenty twenty-five, roughly ninety-three percent of 00:03:08.408 --> 00:03:12.078 banks in the United States were members of a Federal Home Loan Bank. 00:03:12.784 --> 00:03:16.654 The primary service the system provides is liquidity, delivered through 00:03:16.654 --> 00:03:18.794 secured loans known as advances. 00:03:19.451 --> 00:03:21.541 These advances are fully collateralized. 00:03:22.171 --> 00:03:26.391 Members must pledge eligible collateral, such as mortgage loans or government 00:03:26.391 --> 00:03:30.561 securities, and conservative haircuts are applied to protect against loss. 00:03:31.285 --> 00:03:35.165 Advances are available in a wide range of maturities, from overnight 00:03:35.165 --> 00:03:37.125 funding to longer-term structures. 00:03:37.856 --> 00:03:41.986 And importantly, borrowing from a Federal Home Loan Bank is considered a normal 00:03:41.986 --> 00:03:44.146 part of day-to-day liquidity management. 00:03:44.972 --> 00:03:47.962 Unlike borrowing from the Federal Reserve’s discount window, 00:03:48.222 --> 00:03:49.812 there is no stigma attached. 00:03:50.609 --> 00:03:55.029 One of the most striking findings in the G A O report is that most banks behaved 00:03:55.029 --> 00:03:57.369 in a remarkably consistent way over time. 00:03:58.152 --> 00:04:01.332 From twenty fifteen through mid twenty twenty-five, the vast 00:04:01.332 --> 00:04:05.172 majority of banks borrowed from their Federal Home Loan Bank regularly. 00:04:05.919 --> 00:04:09.179 More importantly, they kept their level of borrowing within a stable 00:04:09.179 --> 00:04:11.449 range relative to their total assets. 00:04:12.064 --> 00:04:16.254 The G A O summarized this clearly, stating that most banks maintained 00:04:16.254 --> 00:04:20.164 relatively consistent reliance on Federal Home Loan Bank advances, 00:04:20.394 --> 00:04:22.094 even during periods of stress. 00:04:22.810 --> 00:04:26.900 At the median level, Federal Home Loan Bank borrowing typically represented 00:04:26.900 --> 00:04:29.260 zero to five percent of total assets. 00:04:29.945 --> 00:04:33.695 That was true in calm periods, and it was also true during the onset 00:04:33.695 --> 00:04:37.365 of the pandemic and during the March twenty twenty-three banking turmoil. 00:04:38.085 --> 00:04:42.085 This finding matters because it directly challenges the idea that banks suddenly 00:04:42.085 --> 00:04:46.555 become dependent on Federal Home Loan Bank funding when conditions deteriorate. 00:04:47.408 --> 00:04:50.258 For most institutions, that simply did not happen. 00:04:50.860 --> 00:04:54.400 So why did total system-wide borrowing spike so dramatically? 00:04:54.999 --> 00:04:57.199 The answer is both simple and precise. 00:04:57.897 --> 00:05:01.687 A very small number of large banks drove nearly all of the increase. 00:05:02.380 --> 00:05:05.990 During the first quarter of twenty twenty-three, banks with more than ten 00:05:05.990 --> 00:05:10.020 billion dollars in assets accounted for ninety-seven percent of the increase in 00:05:10.020 --> 00:05:12.360 total Federal Home Loan Bank borrowing. 00:05:13.078 --> 00:05:16.358 Even though these large banks represented only a small fraction 00:05:16.358 --> 00:05:20.458 of total institutions, they held the majority of outstanding advances. 00:05:21.188 --> 00:05:24.698 And even then, for most of those banks, the increases in borrowing 00:05:24.698 --> 00:05:28.288 still represented a relatively small share of total assets. 00:05:28.959 --> 00:05:32.869 The G A O also explored why banks use Federal Home Loan Bank 00:05:32.869 --> 00:05:34.409 advances in the first place. 00:05:35.077 --> 00:05:39.547 Executives across asset sizes and regions cited several consistent reasons. 00:05:40.262 --> 00:05:42.032 First, speed and certainty. 00:05:42.622 --> 00:05:45.412 Funds can often be accessed the same business day. 00:05:46.100 --> 00:05:47.470 Second, flexibility. 00:05:48.110 --> 00:05:51.340 Advances are available across a wide range of maturities. 00:05:52.136 --> 00:05:53.116 Third, cost. 00:05:53.656 --> 00:05:57.426 Advances are competitively priced, and members receive dividends on 00:05:57.426 --> 00:06:01.896 Federal Home Loan Bank stock, which can reduce effective borrowing costs. 00:06:02.643 --> 00:06:04.513 And fourth, the absence of stigma. 00:06:05.213 --> 00:06:09.893 Because Federal Home Loan Bank borrowing is part of normal operations, using it 00:06:09.893 --> 00:06:12.023 during stress does not signal weakness. 00:06:12.692 --> 00:06:16.532 The most important question, however, is what happens after banks borrow. 00:06:17.266 --> 00:06:21.126 To answer that, the G A O used econometric models that controlled 00:06:21.126 --> 00:06:25.056 for bank health, macroeconomic conditions, and business cycles. 00:06:25.829 --> 00:06:30.259 For banks with ten billion dollars or less in assets, higher Federal Home 00:06:30.259 --> 00:06:34.119 Loan Bank borrowing was generally associated with positive outcomes. 00:06:34.776 --> 00:06:38.586 These banks tended to lend more overall, including more residential 00:06:38.586 --> 00:06:42.566 and commercial real estate lending, and modest increases in consumer 00:06:42.566 --> 00:06:44.486 lending during periods of stress. 00:06:45.143 --> 00:06:49.193 The G A O found that higher Federal Home Loan Bank borrowing was also 00:06:49.193 --> 00:06:53.543 associated with a lower likelihood of appearing on the F D I C’s Problem 00:06:53.543 --> 00:06:57.623 Bank List and a lower likelihood of failure or voluntary liquidation. 00:06:58.367 --> 00:07:02.677 The G A O stated clearly that it found no evidence that higher Federal Home 00:07:02.677 --> 00:07:07.007 Loan Bank borrowing was associated with increased safety and soundness risk. 00:07:07.755 --> 00:07:11.655 For smaller banks, the relationship often ran in the opposite direction. 00:07:12.379 --> 00:07:15.719 The report does not ignore the failures of March twenty twenty-three. 00:07:16.462 --> 00:07:18.172 But it places them in context. 00:07:18.932 --> 00:07:22.892 Among the banks that significantly increased reliance on Federal Home Loan 00:07:22.892 --> 00:07:27.112 Bank advances ahead of that period, one failed, while others reduced 00:07:27.112 --> 00:07:28.952 borrowing quickly and stabilized. 00:07:29.678 --> 00:07:33.678 Regulators told the G A O that they do not view Federal Home Loan Bank 00:07:33.778 --> 00:07:35.878 borrowing by itself as a red flag. 00:07:36.677 --> 00:07:41.177 Instead, they focus on sudden deviations from a bank’s normal funding patterns. 00:07:41.848 --> 00:07:45.788 The G A O also reviewed policy proposals aimed at reforming the 00:07:45.788 --> 00:07:47.628 Federal Home Loan Bank system. 00:07:48.398 --> 00:07:52.178 While some proposals could address specific concerns, the G A O 00:07:52.178 --> 00:07:56.248 concluded that each carried meaningful tradeoffs, particularly for smaller 00:07:56.248 --> 00:07:58.248 institutions and housing markets. 00:07:58.925 --> 00:08:02.885 In several cases, proposed changes would duplicate existing oversight 00:08:03.045 --> 00:08:06.275 or unintentionally restrict liquidity when it is most needed. 00:08:07.077 --> 00:08:10.607 One area where the G A O did identify room for improvement was 00:08:10.607 --> 00:08:14.727 coordination between Federal Home Loan Banks and Federal Reserve Banks. 00:08:15.461 --> 00:08:20.011 Following the March twenty twenty-three stress period, joint exercises began, and 00:08:20.011 --> 00:08:23.761 a formal working group was established in January of twenty twenty-five. 00:08:24.606 --> 00:08:28.186 These efforts are ongoing and are intended to improve readiness for 00:08:28.186 --> 00:08:30.236 future periods of financial stress. 00:08:30.915 --> 00:08:31.985 So what’s the takeaway? 00:08:32.605 --> 00:08:36.385 The Federal Home Loan Bank system largely functioned as designed. 00:08:37.123 --> 00:08:40.893 It provided liquidity without panic, supported lending, and contributed 00:08:40.893 --> 00:08:44.573 to stability, especially for community-focused institutions. 00:08:45.282 --> 00:08:48.702 The data do not support the idea that Federal Home Loan Banks 00:08:48.702 --> 00:08:50.752 broadly increase systemic risk. 00:08:51.515 --> 00:08:55.235 Instead, the evidence suggests that when used consistently and prudently, 00:08:55.465 --> 00:08:59.315 Federal Home Loan Bank advances can serve as a stabilizing force 00:08:59.475 --> 00:09:01.075 rather than a hidden liability. 00:09:01.816 --> 00:09:03.306 This concludes the document. 00:09:03.696 --> 00:09:07.906 If your credit union could use assistance with your exam, reach out to Mark Treichel 00:09:07.906 --> 00:09:10.386 on LinkedIn or at Mark Treichel dot com. 00:09:10.976 --> 00:09:13.656 This is Samantha Shares, and we thank you for listening.