Federal Home Loan Banks and Financial Stability

The Federal Home Loan Banks (FHLBs) are the less well-known siblings of Fannie Mae and Freddie Mac. Since these government-sponsored enterprises were created in 1932, changes in housing finance markets have rendered largely irrelevant their original purpose of increasing the availability of mortgages. Yet the level and scope of their activities have increased dramatically in recent decades. These activities have at times both exacerbated risks to financial stability and obstructed the missions of federal financial regulators. Behind these undesirable outcomes lies the public/private hybrid nature of the FHLBs. The private ownership and control of the FHLBs provide an incentive to take advantage of the considerable public privileges from which they benefit—including an explicit line of credit from the United States Government and an implied guarantee of all their debt similar to that enjoyed by Fannie Mae and Freddie Mac before the Global Financial Crisis. This article examines past incidence and future potential for the FHLBs to amplify financial stability risks. It offers a framework for regulatory reform by the Federal Housing Finance Agency to contain these risks and avoid harmful interference with the activities of other federal regulators.