The Federal Home Loan Bank System has played an outsized role in shoring up the balance sheets of hundreds of banks this year, including banks that have failed and banks that are still under stress. Home Loan bank executives say the system is working precisely as Congress intended it to.
Silicon Valley Bank, Signature Bank and Silvergate Bank were among the largest borrowers last year of the Home Loan Bank System. The three failed banks, one of which self-liquidated, received a combined $30.6 billion from the Home Loan banks last year, just months before their collapse.
Other banks with interest rate-related strains also were among
The $1.2 trillion-asset Home Loan Bank System has pumped nearly a half-trillion dollars into the banking industry so far this year in the form of secured loans, known as advances, to meet the needs of its members. The system's Office of Finance — its capital markets hub — issues bonds that come with an implied government guarantee, supporting financial institutions that need quick funding.
Critics want its regulator, the Federal Housing Finance Agency, to examine the system's many benefits, including whether the super-lien priority given the the system ahead of the Federal Deposit Insurance Corp., provides a perverse incentive to lend to institutions right up until they fail.
"A lot of times when banks fail, they often look like the Wile E. Coyote, who managed to run off the cliff for quite a while before looking down," said Aaron Klein, a senior fellow at the Brookings Institution and former deputy assistant secretary for economic policy at the Treasury Department. "The Home Loan banks are the support that allowed the coyote to keep going into thin air."
José R. González, president and CEO of the New York Home Loan Bank, said the liquidity crisis has shown how crucial the system is in providing financing during times of stress.
"We were able to meet demand for liquidity that our members needed in a very unsettled market, which is what we are supposed to do as a foundational mission," González said in an interview with American Banker. "The system was able to meet the extraordinary demand because of our fortress balance sheet and our ability to access the market in all conditions."
The need for liquidity has receded for now, he said, while noting the peculiarity of the crisis hat initially was driven by social media.
"It was a very particular type of liquidity crisis, driven by a crisis of confidence," said González. "It was really a concern that depositors would lose confidence in the safety of their deposits in insured banks. It's really quite unprecedented since the creation of the FDIC in 1933, and contemporaneously with our creation, and that's why, in my opinion, the government mobilized to deliver a message of reassurance to the markets that there really is no fundamental concern about the capital levels and the asset quality of our financial institutions."
Bart Dzivi, a former acting general counsel to the San Francisco Home Loan Bank, said the system "is executing precisely" on the mission that Congress gave them.
"The FHLBs were designed to lend to failing institutions in order to stop financial contagion from spreading to other institutions," said Dzivi, a former special counsel to the Financial Crisis Inquiry Commission and counsel to the Senate Banking Committee.
Some critics are questioning why the system of 11 regional banks has evolved to become a provider of liquidity essentially replacing the Federal Reserve. The Federal Home Loan Bank System was originally created in 1932 to give savings and loan institutions a source of long-term funding to aid housing in the Depression.
Bruce Morrison, a former congressman from Connecticut and former chairman of the Federal Housing Finance Board, the predecessor to the FHFA, said the Federal Reserve, should be the main provider of liquidity which would ensure that banks behave in a fiscally-responsible manner. He said the discipline of the marketplace, which normally would force a bank under stress to pay more to borrow, has been lost in the shuffle.
The Home Loan banks have become "this easy-money alternative," Morrison said, "that lets companies play fast-and-loose so they don't have to go for the Fed [for liquidity.] And that's not good policy. Period. Their existence is just an end-run around the Fed."
"The question now is: Why does the federal government run competing liquidity sources? Isn't the Fed the liquidity source?" said Morrison. "And if there are negatives to borrowing from the Fed, aren't those negatives what we want — to keep companies competing in a proper manner? If the Fed is tough on you when you come for liquidity, isn't that part of its job as a bank regulator?"
Klein and other experts point to the three recent bank collapses — as well as those of IndyMac Bank and Washington Mutual during the 2008 financial crisis — to claim far greater scrutiny is needed by the Federal Housing Finance Agency, the system's regulator. Last year, FHFA Director Sandra Thompson
A core bone of contention is the Home Loan banks' super lien priority ahead of the FDIC when a bank fails.
"When a bank fails, the FHLB is the only entity that gets paid out ahead of the FDIC," said Klein, who wrote about the rush by banks to get cash from the system in
Silicon Valley Bank, the largest borrower and shareholder of the San Francisco Home Loan Bank, had the $15 billion in advances that it had borrowed at year-end repaid in full, according to the Home Loan bank's combined year-end
As banks' first quarter earnings season continues into its second week, analysts are questioning whether Home Loan Bank advances are a sign of ample liquidity — and therefore strength — or a potential sign of financial distress.
San Francisco-based
Charles Schwab Bank, in Westlake, Tex., was the largest borrower of the Dallas Home Loan Bank with $10 billion in advances at year-end. New York Community Bank's Flagstar subsidiary borrowed $15.8 billion from the New York Home Loan Bank, becoming the second-largest borrower of that district after Citigroup Inc., with $19.2 billion in advances. Flagstar also was the largest borrower last year of the Indianapolis Home Loan Bank with another $4.5 billion borrowed at year-end.
Among top banks, the system's biggest borrowers last year were PNC Financial Services Group and Wells Fargo, which each borrowed $32 billion, followed by Truist Financial Corp., with $29.7 billion.
Dzivi said providing liquidity is the reason the system was created because savings and loans during the Depression had a mix of both severely past due loans and performing home loans. In 1933, about half of the system members did not have sufficient cash flow from their assets to immediately pay depositors who wanted to withdraw some of their money, he said.
"That is literally what the Federal Home Loan Banks did when they were created: give massively over-collateralized loans to their members to fund 'runs' by uninsured depositors who wanted their money back," he said.
