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.
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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.