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L-R: Jim Parrott, Nonresident Fellow at the Urban Institute, and Mark Zandi, Chief Economist for Moody’s Analytics.
L-R: Jim Parrott, Nonresident Fellow at the Urban Institute, and Mark Zandi, Chief Economist for Moody’s Analytics.

Research Defends FHLB System as CUs Increasingly Rely on It

Credit unions in California and Nevada have partnered with the San Francisco Federal Home Loan Bank for many years as liquidity needs ebb and flow throughout history. In fact, the entire U.S. federal home loan bank system issued a record $495 billion of debt in March 2023 to fund loans, which are called “advances,” to banks and credit unions nationwide.

However, the last several years of market disruption — from dramatic swings caused by the COVID-19 pandemic to stress created by the recent “run” on Silicon Valley Bank — have made it clear how important durable sources of liquidity are to the stability of the U.S. financial system, according to the argument in a new research paper.

“Warehouse lenders, capital markets, and the Federal Reserve provide much of what is needed — but not all,” states a newly published paper through the Urban Institute’s latest housing finance policy update. “Relying entirely on warehouse lenders and capital markets would leave the system vulnerable to dramatic swings in market confidence. And while the Fed stands ready to step in during periods of crisis, it takes time to do so with the force, breadth, and nuance often needed.”

The paper — In Defense of the Federal Home Loan Banks — comes out at an important time in banking history as the U.S. Federal Home Loan Bank (FHLB) system helps fill the gap between those above-mentioned two sources of funding, offering access to low-cost liquidity through different cycles for institutions operating in the mortgage market, the paper states.

The authors — Jim Parrott (nonresident fellow at the Urban Institute and owner of Parrott Ryan Advisors) and Mark Zandi (chief economist for Moody’s Analytics) — argue that the FHLB system helps stabilize the cost and availability of mortgage credit, and with it, the housing market and broader economy.

“If anything, the FHLB system should be expanded to provide that support more broadly and effectively in an everchanging mortgage market and financial system,” the paper states.

Their opinion comes at a time when banks and credit unions are turning to the FHLB system to shore up their balance sheets, according to a report in the Wall Street Journal. The system was established during the Great Depression to help promote mortgage lending and is now a source of liquidity for financial institutions of all stripes. Recently, financial institutions have ramped up borrowing as consumers pulled out deposits and financial market investors panicked over bank failures that threw the stability of the U.S. financial system into question.

“Critics say that the home-loan banks have gone beyond their mission of supporting housing, and that the closures show they sometimes prop up banks that aren’t stable,” the Wall Street Journal article states.

However, the Urban Institute’s recently released paper on the importance of today’s FHLB system argues otherwise. In this research paper, you can read more about:

  • How the FHLB system works.
  • How FHLB member institutions benefit from the system.
  • How the economy benefits from the FHLBs.
  • Taxpayer subsidy to the FHLBs.
  • Criticisms of the FHLB, including critiques arguments of how the FHLBs distort the financial system, destabilize it, and could do more to support the mortgage and housing markets than they currently are doing.
  • Expanding FHLB membership.
  • Expanding support for Community Development Financial Institutions (CDFIs).
  • Expanding support for affordable housing.

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