Federal Home Loan Banks: Unsung Heroes of the Financial Crisis?
An important part of the United States banking system — one that generally receives very little press — is the Federal Home Loan Banks system. In a November 2008 paper, researchers at the New York branch of the Federal Reserve called the system the “Lender of Next-to-Last Resort” because it was playing a “significant role at the onset of the ongoing financial crisis” by keeping financial institutions afloat.
The network of 12 Congressionally chartered banks were created in 1932, during the Great Depression, to provide savings-and-loan institutions a means to tap stable, low-cost funding. Now, their mission “is to support residential mortgage lending and community growth in all areas of the country,” the Council of Federal Home Loan Banks, the system’s trade group, told Bloomberg. These banks are cooperative institutions, owned by their borrowers — which range from large commercial banks like JPMorgan Chase (NYSE:JPM), with assets of $2.4 trillion, to smaller community banks — and are seeing lending growing at the fastest pace since the financial crisis began in late 2007.
While a typical member falls into the small, community bank profile — like the $139 million-asset Bank of McCreary County in Kentucky or the $40 million-asset Rural Cooperatives Credit Union – the lending spike has little to do with the 7,600 community banks, thrifts, credit unions, and insurers that are members. JPMorgan, Bank of America (NYSE:BAC), and Citigroup (NYSE:C) are the three largest borrowers, and if they were excluded, lending by the Federal Home Loan Banks (FHLB) systems would be decreasing, rather than increasing.