Thus far, this blog has set out to dispel the claims made by the FHLBs that maintaining the status quo is acceptable. I believe this was done comprehensively:
- First, members of the FHLB system can borrow from the FHLBs at rates very close to the rates the US Treasury borrows at. This is an unprecedented advantage other participants in the capital markets would love to access, but they can’t – they don’t have access to the FHLB and related cost advantages stemming from the FHLBs GSE status.
- Community banks do benefit from membership – through access to liquidity and the ability to fund mortgage loans by borrowing from the FHLB. But this second element is significantly overstated. Community banks in fact only fund about 10% of their mortgage loans with FHLB advances, and at that level of funding, the benefit of FHLB advances is de minimis.
- Further, while community banks are the centerpiece of the ‘status quo’ PR materials – they represent just 10% of FHLB business.
- The rest of FHLB business goes to larger banks and insurance companies. This isn’t necessarily damning, but it is important to factor into the discussion going forward.
- Lastly, the FHLBs point repeatedly to their Affordable Housing Program as evidence of the good things they do. It is good, but just 10% of annual profits go to the AHP, the rest goes elsewhere. You wouldn’t know that by their messaging.
This level setting is important. I am a fan of the FHLB system – or at least its potential, but not the status quo.
Beginning this week, Phase two of this blog will begin to dive deeper into the economics of the FHLBs so as to quantify and rationalize an expected contribution the FHLBs can make towards affordable housing initiatives.
One Response
Why should Congress — and taxpayers — invest $8 billion a year for a government-supported hedge fund to provide cheap capital to big banks and insurance companies?
Yes, community banks need liquidity but — as you say community banks only represent just 10% of FHLB business.
If you look at the types of financing communities need – water systems; roads, bridges, ports and transit hubs; investments on tribal lands; accessory dwelling units; green retrofits; community land trusts – don’t look to the FHLBanks to accept those loans as collateral or provide discounted long-term loans or letters of credit. There’s no vision or creativity from the Community Investment Officers, the Affordable Housing Advisory Councils or the boards.