The Federal Home Loan Bank (FHLB) System and Selected Policy Issues

August 27, 2020 R46499

The Federal Home Loan Bank (FHLB) System
August 27, 2020
and Selected Policy Issues
Darryl E. Getter
The Federal Home Loan Bank Act of 1932 (FHLB Act; P.L. 72-304, 47 Stat. 128) created the
Specialist in Financial
Federal Home Loan Bank (FHLB) system, which was established to address frequent liquidity
Economics
shortfalls, or cash flow disruptions, experienced by mortgage lenders during the Great

Depression. Congress modified the FHLB system following the savings and loan (S&L) crisis of
the 1980s, the 1986-1992 banking crisis, and the 2008 financial mortgage crisis. The FHLB

system’s primary function and mission, however, have remained intact:
 The FHLBs provide liquidity to participating mortgage market lenders in the form of advances, which are
cash loans to their members. The advances are collateralized (secured) by members’ assets, such as
mortgages, mortgage-related assets, and certain small business loans. Because financial institutions
typically borrow the funds that will be lent to their customers, FHLB members have an additional source to
obtain short-term cash loans—namely, their district FHLB.
 The FHLBs support low- and moderate-income (LMI) mortgage lending and related community
investments through various programs. The interest income earned by each FHLB from providing advances
is used to support the affordable housing goals in its respective district. Each FHLB sets aside a percentage
of its income to provide grants for low-income projects. The FHLBs also provide low-cost financing for
economic development initiatives in low-income neighborhoods and certain other public projects.
The FHLB system currently consists of 11 institutions around the country and the system’s Office of Finance, which
collectively constitute one government-sponsored enterprise (GSE). The Office of Finance is the system’s fiscal agent, and it
issues and services the 11 FHLBs’ debt securities (i.e., borrowings). It also compiles and publishes combined financial
statements for the system.
The FHLBs are federally chartered cooperative financial institutions, meaning that each FHLB is privately owned and
capitalized by its members. Four types of financial institutions are able to become FHLB system members: (1) federally
insured depository institutions (i.e., banks and credit unions), (2) insurance companies, (3) community development financial
institutions (CDFIs), and (4) nonfederally insured credit unions that meet certain statutory criteria. Members that have
eligible mortgage and mortgage-related assets may use them as collateral for FHLB advances. Only members and certain
eligible associates may receive FHLB services.
Given that Congress created the FHLBs to facilitate mortgage market liquidity, public policy discussions often consider the
extent to which current operations allow the FHLB system to achieve its public mission. For example, many institutions that
are eligible to join the FHLB system may not be principally engaged in residential mortgage finance, calling into question the
extent to which FHLB advances to those institutions subsidize the funding of mortgages or the funding of member
institutions’ asset portfolios in general. In addition, financial entities arguably use FHLB advances and consolidated liabilities
to replicate financial transactions and positions in order to comply with various prudential regulations. Under these scenarios,
the FHLBs’ lending activities might not directly promote greater mortgage financing activities of its members, even though
the system does generate funds that are used to support some public mission goals.
By contrast, certain nonbank financial entities that primarily hold mortgages and mortgage-related assets are ineligible to
become FHLB members, largely because they do not have either a federal or state prudential regulator. Furthermore, some
mortgage-related assets cannot be used as collateral for FHLB advances (e.g., mortgage servicing rights). Hence, some
nonbank firms, which do not collect federally insured deposits and may face greater liquidity risks relative to banks , are
principally engaged in mortgage financing yet cannot join the FHLB system.
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The Federal Home Loan Bank System and Selected Policy Issues

Introduction
The Federal Home Loan Bank Act of 1932 (FHLB Act; P.L. 72-304, 47 Stat. 128) created the
Federal Home Loan Bank (FHLB) system. The system currently consists of 11 institutions and its
Office of Finance, which collectively constitute one government-sponsored enterprise (GSE). The
FHLBs are federal y chartered cooperative financial institutions, meaning that each FHLB is
privately owned and capitalized by its members.1 Only members and certain eligible associates
may receive FHLB services.2
The FHLB system was established to address frequent liquidity shortfal s, or cash flow
disruptions, experienced by mortgage lenders during the Great Depression. Congress modified
the FHLB system following the savings and loan (S&L) crisis of the 1980s, the 1986-1992
banking crisis, and the 2008 financial mortgage crisis. The FHLB system’s primary function and
mission, however, have remained intact:
 The FHLBs provide liquidity to participating mortgage market lenders in the
form of advances, which are cash loans to their members. The advances are
collateralized (secured) by members’ assets, such as mortgages, mortgage-related
assets, and certain smal business loans. In general, financial institutions typical y
borrow the funds that they intend to lend to their customers. Depositories (i.e.,
banks and credit unions) can borrow from depositors, and depositories and
nonbank financial firms can borrow in the short-term cash money markets. FHLB
members have the additional option of obtaining advances from their district
FHLB. (By contrast, Fannie Mae and Freddie Mac—other GSEs that support the
market for residential and multifamily mortgages—provide liquidity to financial
institutions by purchasing their il iquid mortgage assets that meet certain
eligibility requirements, as opposed to making shorter-term cash loans.3)
 The FHLBs support low- and moderate-income (LMI) mortgage lending and
related community investments through various programs. In addition to funding
general operations, the interest income earned by each FHLB from providing
advances is used to support the affordable housing goals in each respective
district. Each FHLB is required to set aside a percentage of its income to provide
grants for low-income projects. The FHLBs also provide low-cost financing for
economic development initiatives in low-income neighborhoods and certain other
public projects.
The Office of Finance is the FHLB system’s fiscal agent. Just as financial institutions borrow the
funds they wil lend, the FHLB system borrows the funds it wil lend to member institutions. The
Office of Finance issues and services the debt securities (i.e., borrowings) for al 11 FHLBs, and
it compiles and publishes combined financial statements for the system.

1 Credit unions are also cooperatives that are owned by and make loans to their members. For more information, see
CRS Report R46360, The Credit Union System : Developm ents in Lending and Prudential Risk Managem ent, by Darryl
E. Getter.
2 See Federal Housing Finance Agency (FHFA), “Capital Stock Management,” Advisory Bulletin (AB) 2019 -03,
August 15, 2019, at https://www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins/Pages/Capital-Stock-
Management.aspx.
3 For more information about Fannie Mae and Freddie Mac, see CRS Report R45828, Overview of Recent
Adm inistrative Reform s of Fannie Mae and Freddie Mac, by Darryl E. Getter.
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An eligible financial institution that participates in housing finance markets may voluntarily join
the regional FHLB serving the state where its home office or principal place of business is
located. Four types of financial institutions are currently eligible for FHLB membership:4
 federal y insured depositories—consisting of banks with Federal Deposit
Insurance Corporation (FDIC) insured deposits and credit unions with National
Credit Union Administration (NCUA) insured share deposits;
 insurance companies—regulated by state insurance regulators;
 community development financial institutions (CDFIs)—certified by the
Department of the Treasury’s (Treasury’s) CDFI Fund—consisting of
depositories, nonprofit financial institutions, and for-profit venture capital funds
that primarily serve the financial needs of economical y distressed people and
places;5 and
 nonfederal y insured credit unions that meet certain statutory criteria.6
A member institution receives cash advances and dividends on its FHLB’s shares of capital stock.
Because a member is both an FHLB customer and stockholder, the member’s cash advances are
less expensive relative to functional y equivalent repurchase agreements (also cal ed “repos”)
obtained in the private capital markets; likewise, a member’s dividend return is arguably
comparable to the discounted pricing of FHLB advances to attain reasonable (as opposed to
maximum) profitability.7
Because Congress created FHLBs to facilitate mortgage market liquidity, public policy
discussions often consider the system’s effectiveness at achieving the congressional intent. One
concern is that many member institutions eligible to join the FHLB system may not be principal y
engaged in residential mortgage finance, cal ing into question the extent to which FHLB advances
subsidize the funding of mortgages or the funding of member institutions’ asset portfolios in
general. By contrast, certain financial entities that primarily hold mortgages and mortgage-related
assets are ineligible to be FHLB members. The policy debate, therefore, focuses on how closely
the FHLBs’ activities are linked with their public mission and implications regarding the potential
risks for taxpayers.
This report summarizes the FHLB system and some recent policy issues. It begins with an
overview of the financial chal enges that prompted the creation and evolution of the FHLB
system. It then describes the FHLB system’s role as a financial intermediary, its prudential
capitalization and liquidity requirements, and mission goals. This report then discusses policy
issues concerning the extent to which current operations al ow the FHLB system to achieve its
public mission.

4 See FHFA, “Members of Federal Home Loan Banks,” 81 Federal Register 3246-3288, January 20, 2016.
5 See Community Development Financial Institutions (CDFI) Fund, “What Does the CDFI Fund Do?,” at
https://www.cdfifund.gov/Pages/default.aspx.
6 See FHFA, “Federal Home Loan Bank Membership for Non -Federally-Insured Credit Unions,” 82 Federal Register
106, June 5, 2017.
7 See Securities and Exchange Commission (SEC), Form 10: Federal Home Loan Bank of New York, at
https://www.sec.gov/Archives/edgar/data/1329842/000095012305007994/y10017e10v12g.htm (hereinafter cited as
SEC, Form 10: FHLB of New York). Repos are defined in the “ Mortgage Funding or General Wholesale Funding”
section.
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The Federal Home Loan Bank System and Selected Policy Issues

Origins and Evolution of the Federal Home Loan
Bank System
Prior to the creation of the Federal Housing Administration (FHA) in 1934, the lending terms of
residential mortgages were structured to reduce financial risks borne by lenders and al eviate the
funding constraints faced by smal lenders with limited access to deposits. Residential mortgages
typical y were balloon mortgages, meaning that the principal amount did not amortize (i.e.,
decrease in regularly scheduled amounts over time); only interest payments were made over the
loan life, and the last payment included the final interest payment and full principal balance.8
Before the FHA, lenders also required down payments of 50%-60%. Without credit scores and
automated underwriting, borrowers were required to make large down payments to ensure they
had a significant financial stake in the property asset, which would reduce lenders’ default risk.
Larger down payments also translated into smal er mortgage sizes, which reduced the amount of
funds that smal depository institutions needed to accumulate to make the loans.9
During periods of rising unemployment, particularly during the Great Depression, frequent
deposit withdrawals led to cash flow disruptions and stymied lending.10 For-profit commercial
banks, which were principal y engaged in making commercial business loans, could turn to the
Federal Reserve System—specifical y, to the regional Federal Reserve bank where they were
members—to obtain cash advances when experiencing cash shortfal s.11 By pledging a
performing asset (e.g., loan, bond) as collateral, a bank could obtain cash from its member
regional Federal Reserve bank to ease funding needs.12
Savings and Loan (S&L) associations were not eligible to be members of the Federal Reserve
System; they were nonprofit, member-owned cooperative financial institutions that relied on
member savings deposits to fund residential home mortgages.13 Without access to a lender of last
resort that could provide cash advances, S&L associations lacked a short-term funding alternative
when cash liquidity shortfal s (funding gaps) emerged—specifical y, when the demand for

8 Prior to the establishment of the Federal Housing Administration (FHA), most residential mortgages were
nonamortizing and variable rate, with 6- to 11-year terms. T he FHA encouraged the use of residential mortgages that
were amortizing and fixed rate, with terms of 20 years or more. See U.S. Department of Housing and Urban
Development (HUD), Office of Policy Development and Research, Evolution of the U.S. Housing Finance System : A
Historical Survey and Lessons for Em erging Mortgage Markets, April 2006, at https://www.huduser.gov/publications/
pdf/US_evolution.pdf; and Edward Szymanoski et al., The FHA Single-Fam ily Insurance Program : Perform ing a
Needed Role in the Housing Finance Market, HUD, Office of Policy Development and Research, Working Paper no.
HF-019, December 2012, at https://www.huduser.gov/portal/publications/FHA_SingleFamilyIns_2012.pdf.
9 For example, U.S. restrictions on interstate and branch banking, as well as eligibility requirements to become credit
union members, limited the ability of depository firms to collect deposits that were used to make loans. For mor e
information, see David L. Mengle, The Case for Interstate Branch Banking, Federal Reserve Bank of Richmond,
Econom ic Review (November/December 1990), at https://www.richmondfed.org/-/media/richmondfedorg/publications/
research/economic_review/1990/pdf/er760601.pdf.
10 Federal Deposit Insurance Corporation (FDIC), “ Historical T imeline,” at https://www.fdic.gov/about/history/
timeline/1930s.html.
11 Federal Reserve Act of 1913 (P.L. 63-43, 38 Stat. 251). Only commercial banks could be members of the Federal
Reserve System and use the discount window to obtain cash advances.
12 Commercial banks with access to the Federal Reserve System discount window could use commercial or business
loans as eligible collateral for advances. See James A. Clouse, “ Recent Developments in Discount Window Policy,”
Federal Reserve Bulletin, November 1994, pp. 965-977 (hereinafter Clouse, “ Recent Developments in Discount
Window Policy,” 1994).
13 Savings and loan (S&L) associations are also referred to as thrifts or thrift institutions.
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The Federal Home Loan Bank System and Selected Policy Issues

mortgage loans outpaced the amount of their deposit holdings.14 Congress responded in 1932 by
creating the FHLB system, analogous to the Federal Reserve System, to provide short-term cash
advances to S&L associations. The FHLB system initial y consisted of 12 regional, member-
owned and federal y chartered banks, each with its own board of directors. The initial 12 regional
FHLBs were located in Atlanta, GA; Boston, MA; Chicago, IL; Cincinnati, OH; Dal as, TX; Des
Moines, IA; Indianapolis, IN; New York, NY; Pittsburgh, PA; San Francisco, CA; Seattle, WA;
and Topeka, KS. These original FHLBs were given the authority to provide cash advances to
federal y chartered S&L members at a discounted rate. The eligible collateral for FHLB advances
consisted primarily of residential mortgage assets held in the portfolios of member S&L
associations, thus promoting a housing finance mission. The profits would be distributed back to
member institutions largely in the form of more favorable rates for advances (compared with
those offered in the short-term money markets), as wel as dividends on the stock shares owned
by the cooperative member institutions.
The Federal Home Loan Bank Board (FHLBB) initial y headed the FHLB system and was given
the authority to regulate and supervise S&L associations.15 Congress also created the Federal
Savings and Loan Insurance Corporation (FSLIC) to insure the deposits collected by S&L
associations; the FSLIC was also under the guidance of the FHLBB.16 Congress enacted the
Emergency Home Finance Act of 1970 (P.L. 91-351, 84 Stat 450) to create the Federal Home
Loan Mortgage Corporation, which now uses the name Freddie Mac, as a whol y owned
subsidiary of the FHLB system to provide liquidity by purchasing conventional mortgages from
the system’s members (i.e., the S&L associations).17 The FHLB system remained largely intact
for several decades until changes were made following the S&L crisis of the 1980s, the 1986-
1992 commercial banking section crisis, and the 2008 financial mortgage crisis.18
The Savings and Loan Crisis
During the late 1970s and early 1980s, rising inflation and interest rates prompted depositors to
withdraw funds from their savings accounts with regulated interest rate caps and deposit them in
unregulated accounts, such as those offered by money market mutual funds, to earn higher

14 S&L associations were not able to join the Federal Reserve System until after the passage of the Depository
Institutions Deregulation and Monetary Control Act of 1980 (P.L. 96-221). See Clouse, “ Recent Developments in
Discount Window Policy,” 1994, pp. 965-977.
15 Under the Federal Home Loan Bank Board’s guidance, the regional FHLBs provided regulatory oversight for their
S&L members.
16 T he National Housing Act of 1934 (P.L. 73-479, 49 Stat. 684) created the Federal Savings and Loan Insurance
Corporation (FSLIC)—analogous to the FDIC. T he FDIC insured deposits only for the commercial banking system at
that time. In 1989, the FDIC assumed responsibility for the bankrupt fund as the Savings Association Insurance Fund
(SAIF). After passage of the Federal Deposit Insurance Reform Act of 2005 ( P.L. 109-171, 120 Stat. 9), t he FDIC
merged the Bank Insurance Fund for commercial banks and the SAIF to form the Deposit Insurance Fund, which
became effective on March 31, 2006. See FDIC, “ Deposit Insurance Fund: Merger of Bank Insurance Fund and
Savings Association Insurance Fund,” FIL-36-2006, April 27, 2006, at https://www.fdic.gov/news/news/financial/
2006/fil06036.html.
17 Fannie Mae was restricted to secondary market t rading of federally insured mortgages, working primarily with
mortgage bankers rather than with S&L lenders. For more information, see CRS Report R45828, Overview of Recent
Adm inistrative Reform s of Fannie Mae and Freddie Mac, by Darryl E. Getter.
18 See George J. Gaberlavage, The Federal Home Loan Bank System: A Chronological Review and Discussion of Key
Issues, Consumer Federation of America, June 2017, at https://consumerfed.org/wp-content/uploads/2017/06/6-14-17-
FHLB_Report.pdf.
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yields.19 Many S&L associations became insolvent following the deposit runoff, which
contributed to the FSLIC’s insolvency.20
Further evolution of the FHLB system resulted from Congress’s response to the S&L crisis,
particularly passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA; P.L. 101-73, 103 Stat. 83). FIRREA made the following changes:
 abolished the FHLBB and replaced it with the Federal Housing Finance Board as
the FHLB system’s primary regulator;
 shifted the regulatory and deposit insurance functions for the remaining S&L
associations to the Office of Thrift Supervision (and to the FDIC for savings
banks);21
 removed Freddie Mac from the FHLB system and reconstituted it as a publicly
owned stock corporation;22
 expanded FHLB membership, al owing al federal y insured depository
institutions membership in the FHLB system as long as at least 10% of their
assets were mortgages; and
 required at least 10% of each FHLB’s net earnings be set aside to (1) provide
funding for LMI housing programs and (2) repay the expenses incurred to
reimburse insured S&L depositors, discussed in the textbox below.

19 Regulation Q interest rate ceilings, stemming from the Banking Act of 1933 (48 Stat. 162) and the Banking Act of
1935 (49 Stat. 684), capped the interest that could be paid on savings deposits. See T imothy Q. Cook, “ Regulation Q
and the Behavior of Savings and Small T ime Deposits at Commercial Banks and the T hrift Institutions,” Federal
Reserve Bank of Richmond, Econom ic Review (November/December 1978), at https://www.richmondfed.org/-/media/
richmondfedorg/publications/research/economic_review/1978/pdf/er640602.pdf; R. Alton Gilbert, “ Requiem for
Regulation Q: What It Did and Why It Passed Away,” Federal Reserve Bank of St. Louis, Review, vol. 68, no. 2
(February 1986), at https://files.stlouisfed.org/files/htdocs/publications/review/86/02/Requiem_Feb1986.pdf; Paul
Calem, “T he New Bank Deposit Markets: Goodbye to Regulation Q,” Federal Reserve Bank of Philadelphia, Business
Review (November/December 1985), at http://www.philadelphiafed.org/research-and-data/publications/business-
review/1985/brnd85pc.pdf; R. Alton Gilbert, “ Will the Removal of Regulation Q Raise Mortgage Interest Rates?”
Federal Reserve Bank of St. Louis, Review (December 1981), at http://research.stlouisfed.org/publications/review/81/
12/Removal_Dec1981.pdf; and Charlotte E. Ruebling, “ T he Administration of Regulation Q,” Federal Reserve Bank of
St. Louis, Review (February 1970), at http://research.stlouisfed.org/publications/review/70/02/
Administration_Feb1970.pdf. For information on the S&L crisis, see Alane K. Moysich, “ Chapter 4: T he Savings and
Loan Crisis and Its Relationship to Banking,” FDIC, History of the 80s: An Examination of the Banking Crises of the
1980s and Early 1990s, December 1997, at http://www.fdic.gov/bank/historical/history/167_188.pdf; and FDIC, “ T he
S&L Crisis: A Chrono-Bibliography,” at https://www.fdic.gov/bank/historical/sandl/.
20 Even without Regulation Q caps on depository accounts, S&L associations would have experienced financial distress
had they attempted to pay depositors’ short-term interest rates, which had risen to levels that exceeded the long-term
fixed interest rate yields attached to mortgages held in their lending portfolios.
21 T he Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act; P.L. 111-203) abolished the
Office of T hrift Supervision, transferring its authority and duties to the Federal Reserve, Office of the Comptr oller of
the Currency (OCC), and FDIC.
22 T he Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (P.L. 101-73, 103 Stat. 83) also
eliminated the separate missions of Fannie Mae and Freddie Mac, making their characteristics and missions similar
today.
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Resolving Troubled Savings and Loan (S&L) Associations and Repaying Expenses
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA; P.L. 101-73, 103 Stat. 83)
created the Resolution Trust Corporation (RTC), a temporary federal agency established to act as a conservator
and receiver of insolvent S&L associations fol owing the insolvency of the Federal Savings and Loan Insurance
Corporation. The RTC’s principal funding source to cover expenses was raised by an off-budget entity, the
Resolution Funding Corporation (REFCORP). FIRREA created REFCORP to issue $30 bil ion in Treasury bonds,
and the Federal Home Loan Bank (FHLB) system was required to make annual interest payments of $300 mil ion
on those bonds.23 The RTC, which existed from August 1989 to December 1995, resolved 531 insolvent
institutions.24
The Gramm-Leach-Bliley Act (P.L. 106-102, 113 Stat. 1338) altered and simplified the required obligation of the
system’s contribution to the old REFCORP debt. Rather than a fixed $300 mil ion, each FHLB was required to pay
20% of net earnings—after making payments to the system’s Affordable Housing Programs—to help repay interest
on bonds issued by REFCORP, raising the likelihood that payments would be sufficient to defease or prepay the
debt ahead of schedule. On July 15, 2011, the Federal Housing Finance Agency determined that the FHLBs had
repaid the REFCORP obligation and would no longer be required to make contributions.25
Instability in the Commercial Banking Sector
The commercial banking sector also experienced periods of instability. Regional downturns in
Texas and New England led to the failure of approximately 1,000 commercial banks during the
1986-1992 period.26 In the 1992-1999 period, commercial banks experienced funding gaps.27
Although the Federal Reserve’s discount window is used primarily as an emergency funding
source, further modifications to the FLHB system resulted in a permanent nonemergency funding
source for banks.28
Specifical y, Congress passed the Federal Home Loan Bank System Modernization Act of 1999,
Title VI of the Gramm-Leach-Bliley Act (GLBA; P.L. 106-102, 113 Stat. 1338), which made
additional changes.

23 See Federal Housing Finance Board (FHFB), “Determination of Appropriate Present -Value Factors Associated with
Payments Made By the Federal Home Loan Banking System to the Resolution Funding Corporation,” 65 Federal
Register 5447-5453, February 4, 2000.
24 See FDIC, Managing the Crisis: The FDIC and RTC Experience, Volume 1 , December 1997, at
https://www.fdic.gov/bank/historical/managing/documents/history-consolidated.pdf. T he Financing Corporation
(FICO) was established to issue bonds after passage of the FSLIC Recapitalization Act of 1987 ( P.L. 100-86, 101 Stat
552). T he Deposit Insurance Funds Act of 1996 (P.L. 104-208) authorized the FDIC to collect a special assessment on
banks and savings banks to pay interest on the FICO bonds. Outstanding FICO bonds matured from 2017 through
2019. For more information, see FDIC, “ FICO Assessment,” at https://www.fdic.gov/deposit/insurance/risk/
assesrte.html.
25 See FHFA, FHFB, and HUD Office of Federal Housing Enterprise Oversight, “Repeal of Regulations,” 76 Federal
Register 74648-74649, December 1, 2011.
26 See Eliana Balla et al., Did Banking Reforms of the Early 1990s Fail? Lessons from Comparing Two Banking Crises,
Federal Reserve Bank of Richmond, Econom ic Brief, no. 15-06, June 2015, at https://www.richmondfed.org/-/media/
richmondfedorg/publications/research/economic_brief/2015/pdf/eb_15-06.pdf; and FDIC, “ Managing the Crisis: T he
FDIC and RT C Experience—Chronological Overview,” at https://www.fdic.gov/bank/historical/managing/
chronological/1990.html.
27 See Dusan Stojanovic, Mark D. Vaughan, and T imothy J. Yeager, “Do Federal Home Loan Bank Membership and
Advances Increase Bank Risk-T aking?,” Journal of Banking & Finance, vol. 32, no. 5 (May 2008), pp. 680 -698
(hereinafter Stojanovic, Vaughan, and Yeager, “Do FHLB Membership and Advances Increase Bank Risk -T aking?,”
2008).
28 T he Federal Reserve’s discount window is designed to provide emergency short -term funding. For more information,
see the textbox in the “ Mortgage Funding or General Wholesale Funding” section.
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 The GLBA reduced barriers that had prevented more commercial banks from
joining the FHLB system. Because commercial banks’ lending portfolios
historical y contained smal er percentages of residential mortgages relative to
thrifts, the GLBA removed the minimum mortgage asset requirement of 10% for
membership. In addition, the GLBA gave FHLBs the ability to make advances
secured by collateral other than mortgage loans—specifical y, agricultural and
smal business loans.
 In light of concerns that banks could withdraw their memberships with only six-
months’ notice and leave an FHLB insufficiently capitalized, the GLBA required
a more permanent and risk-based capital structure for the system, discussed in the
“Regulatory Capital and Liquidity Requirements” section.29
The 2007-2009 Financial Crisis
During the 2007-2009 financial crisis and concurrent “Great Recession,” numerous financial
institutions experienced distress following a sharp rise in the percentage of nonperforming U.S.
mortgage loans. For example, Washington Mutual (WaMu) was an S&L association principal y
engaged in residential mortgages, and it accounted for approximately one-third of the lending by
the FHLB of Seattle.30 In 2007, WaMu experienced loan losses, borrowing capacity limitations,
and a significantly depressed stock price.31 In September 2008, WaMu became insolvent and was
placed into receivership by the FDIC. The FHLB of Seattle then became undercapitalized and
was merged with the FHLB of Des Moines on May 31, 2015, leaving 11 FHLBs.32
Congress passed the Housing and Economic Recovery Act of 2008 (HERA; P.L. 110-289) that,
among other things, created the Federal Housing Finance Agency (FHFA). The FHFA became the
prudential regulator for al the housing GSE systems, replacing the Federal Housing Finance
Board and the Office of Federal Housing Enterprise Oversight (under the Department of Housing
and Urban Development), which had been the safety and soundness regulator for Fannie Mae and
Freddie Mac.
Current Financial Structure and Public Mission
The FHLBs are financial intermediaries that, similar to depositories, match savers with
borrowers. Under a traditional intermediation business model, a firm borrows funds from savers
(e.g., depositors) and uses those funds to originate longer-term consumer and commercial
business loans. Consumers and businesses pay higher interest rates for loans with longer
maturities relative to the lower interest rates intermediaries pay for successive sequences of loans
(e.g., recurring deposits) for shorter periods of time. Lending spreads, or profits, are computed as

29 See U.S. Government Accountability Office (GAO), Federal Home Loan Bank: An Overview of Changes and
Current Issues Affecting the System , GAO-489T , April 13, 2005, at https://www.govinfo.gov/content/pkg/
GAOREPORT S-GAO-05-489T /html/GAOREPORT S-GAO-05-489T .htm.
30 See Drew DeSilver, “Seattle’s Federal Home Loan Bank in Big Money T rouble Again,” The Seattle Times, July 19,
2009, at https://www.seattletimes.com/business/seattles-federal-home-loan-bank-in-big-money-trouble-again/
(hereinafter DeSilver, “Seattle’s FHLB in Big Money T rouble Again,” 2009).
31 See Offices of Inspector General, Department of the Treasury (T reasury) and FDIC, Evaluation of Federal
Regulatory Oversight of Washington Mutual Bank, Report no. EVAL-10-002, April 2010, at https://www.fdicoig.gov/
publications/reports10/Eval-10-002-508.shtml.
32 See FHFA Office of the Inspector General, Merger of the Federal Home Loan Banks of Des Moines and Seattle:
FHFA’s Role, WPR-2016-002, March 16, 2016, at https://www.fhfaoig.gov/sites/default/files/WPR-2016-002.pdf.
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the difference between the asset returns (yields) that accrue from holding longer-term loans minus
the costs of its liabilities, consisting primarily of shorter-term loans.
The FHLBs’ financial lending spreads contain various risks.
 Financial assets in the form of loans and bonds have interest rate risk, meaning
that their market values fluctuate with changes in interest rates.
 Loans and bonds have credit (default) risk, which occurs when borrowers fail to
repay the principal loan amounts and interest obligations.
 Some loans, such as residential mortgages, have prepayment risk or the risk that
borrowers may repay their loans ahead of schedule, reducing the expected yield
of the asset.
 Financial institutions face liquidity risk, or the risk of not being able to sel assets,
obtain (short-term) funding for existing assets, or make payment obligations in a
timely manner for their full value.
 Depositories face funding risk when the difference between the longer-term
(fixed-rate) yields on assets and the short-term variable rates paid to borrow the
cash necessary to fund the assets shrinks, reducing profitability.
Because the inherent risks generated by lending spreads are retained on their balance sheets,
intermediaries general y must comply with capital and liquidity requirements. This section
explains the composition of the FHLBs’ lending spreads, their prudential capital and liquidity
requirements, and their public mission goals.
FHLB System Assets
The primary assets owned by each FHLB are advances, which are the cash loans to members that
must be collateralized or secured at al times with pledged mortgages or other eligible assets.33
The advances are for amounts that are less than the value of the collateral assets, and the
difference between the value of the pledged collateral and the advance is cal ed a haircut.34
Haircuts, which vary by the type of collateral pledged and whether the institution is a depository
or insurance company, protect the lending FHLB against financial loss if a borrowing member
defaults on an advance.35 The FHLBs do not al ow members to pledge loans that would violate

33 T he collateral assets pledged for advances are not reported on an FHLB’s balance sheet, which is consistent with the
Financial Accounting Financial Standards Board ASC 310 guidance for receivables arising from credit sales. See
FHFA, Advances and Collateral, October 2014, at https://www.fhfa.gov/SupervisionRegulation/Documents/Advances-
and-Collateral-Module_2014_revision12015.pdf (hereinafter FHFA, Advances and Collateral, 2014); and Financial
Accounting Standards Board, “ Receivables (T opic 310): Disclosures about the Credit Quality of Financing Receivables
and the Allowance for Credit Losses,” Accounting Standards Update, no. 2010-20, July 2010, at https://www.fasb.org/
jsp/FASB/Document_C/DocumentPage?cid=1176157125490&acceptedDisclaimer=true.
34 Obtaining a loan at a haircut or for less than the value of a pledged collateral asset is similar to obtaining a mortgage
for less than the full value of a house, which occurs when a home buyer makes a down payment. Default incentives are
abated when borrowers forfeit a collateral asset of higher value relative to the outstanding loan. T he haircut differs
from the advance rate, which is the interest cost, charged for an FHLB advance. Suppose a bank pledges an asset worth
$100 for a cash advance of $90 while promising to repay the loan in full at a 10% advance rate —the haircut on the
pledged asset would be $10, and the advance rate charged to the bank would be $9 for a total repayment of $99 for a
$90 loan. See Gary B. Gorton and Andrew Metrick, Securitized Banking and the Run on Repo , National Bureau of
Economic Research (NBER), Working Paper no. 15223, August 2009, a t https://www.nber.org/papers/w15223.
35 For example, using a T reasury security would result in a lower haircut relative to a mortgage loan. T he FHLBs
provide lendable collateral values (LCVs), where an LCV = 100% - percentage of haircut, for institutions by type and
by type of qualifying collateral. For more information, see FHLB of Atlanta, Mem ber Products and Services Guide,
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any federal, state, or local antipredatory lending laws. The FHLBs may ban al loans that meet the
definition of a high-cost loan, as established in the Home Ownership Equity and Protection Act of
1994.36 Table 1 lists some—but perhaps not al —underwriting criteria, eligible collateral that
members are required to pledge for advances, and ineligible collateral. Each FHLB may have
variations and al owable exceptions to the items listed.37 Table 1, therefore, provides a general
overview, but the lending policies of each FHLB should be reviewed independently.38
Table 1. Some Requirements for FHLB Advances
Examples of Underwriting
Examples of Eligible Collateral
Examples of Ineligible
Criteria for Member
Institutions
for Advances
Collateral for Advances
Overal financial condition, including Whole first mortgage loans on
Vacant real properties
quality of assets and capitalization
improved residential property
Overal financial condition of
Debt instruments issued or
Tax credits or warrants
subsidiaries and affiliates
guaranteed by the U.S. government
or any of its agencies
Quality of the eligible col ateral
Mortgage-backed securities (MBS)
Mortgage servicing rights
issued or guaranteed by Freddie
Mac, Fannie Mae, or Ginnie Mae

June 10, 2020, at https://corp.fhlbatl.com/files/documents/member-products-and-services-guide.pdf. Some FHLBs may
use the term lendable value rate instead of LCV. See FHLB of Cincinnati, Advance Forward: Annual Meeting
Webinar, May 14, 2020, at https://www.fhlbcin.com/media/2965/transcript -annual-meeting.pdf.
36 P.L. 90-90–321, T itle I, §129, as added to P.L. 103-103–325, T itle I, §152(d). T he Home Ownership Equity and
Protection Act of 1994 was enacted as an amendment to the T ruth-In-Lending Act of 1968, requiring additional
disclosures of mortgage terms to consumers. For more information, see FHFA, Report on Federal Hom e Loan Bank
Collateral for Advances and Interagency Guidance on Nontraditional Mortgage Products, July 2009, at
https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/
FHLBank%20Collateral%20for%20Advances%20and%20Interagency%2 0Guidance%20on%20Nontraditional%20Mo
rtgage%20Products.pdf.
37 For example, policies regarding participation loans may vary by FHLB. Participation loans are loans provided by
two or more financial institutions. One institution may originate and retain a larger share of financial interest in a loan
while selling one or more smaller shares to other financial institutions. In this case, the loan would not be considered
whole because other shareholders have financial interests. Some FHLBs may prefer whole loans a s collateral, which
would be free and clear of any other interests in case they need to be liquidated. Some FHLBs may allow participation
loans as collateral under certain circumstances, such as to support certain multifamily and community developments.
Some FHLBs may have allowed participation loans to be pledged as collateral in the past but have since revised their
policies. For more information, see SEC, “ Federal Home Loan Bank of Atlanta Credit and Collateral Policy, As
Amended” at https://www.sec.gov/Archives/edgar/data/1331465/000119312507180530/dex101.htm (hereinafter SEC,
“FHLB of Atlanta Credit and Collateral Policy, As Amended”); FHLB of Des Moines, “Participation Loan Guidance,”
February 2020, at https://www.fhlbdm.com/webres/File/member-support/collateral/guidelines-for-pledging-
participation-loan-guidelines.pdf; SEC, Form 10: FHLB of New York; and FHFA, 2009 Annual Report to Congress,
May 10, 2010, at https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2009_AnnualReportToCongress_508.pdf.
38 T he items listed in Table 1 were retrieved primarily from SEC, “FHLB of Atlanta Credit and Collateral Policy, As
Amended”; FHLB of Boston, Products and Solutions Guide, at http://www.fhlbboston.com/downloads/
productsandservices/productspolicy/productsSolutionsGuide.pdf; FHLB of Des Moines, Collateral Procedures, April
2020, at https://www.fhlbdm.com/webres/File/member-support/collateral/Collateral_Procedures.pdf; and SEC, Form
10: FHLB of New York.
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Examples of Underwriting
Examples of Eligible Collateral
Examples of Ineligible
Criteria for Member
for Advances
Collateral for Advances
Institutions
Strategic reason for borrowing (e.g.,
Certain home equity loans and lines
Non-real estate real property
whether the loaned funds would be
of credit, first mortgage loans on
including, but not limited to,
used to purchase safer or riskier
commercial real estate, private-label
houseboats and manufactured
securities relative to the asset used
MBS backed by first mortgage loans,
homes not deemed real property
to col ateralize the loan)
and commercial MBS may be
by applicable state laws
considered if they meet certain
criteria
—
Cash deposited at a member
Financial institution stock; privately
Federal Home Loan Bank (FHLB)
held/unregistered stock
—
Smal business, smal agribusiness,
Loans with borrower col ateral
and smal farm loans from member
defeasance options
community financial institutions
—
—
Loans that would violate any
predatory lending laws.
Source: Congressional Research Service, using information obtained from the FHLBs of Atlanta, GA; Boston,
MA; Des Moines, IA; and New York, NY.
The FHLBs “perfect” their security interests of the collateral asset used for advances via their
statutory superlien authority, meaning that the asset cannot be claimed by any other party.39 An
FHLB also may require physical delivery of the collateral asset. For example, if a member
depository institution were to experience large loan losses and become insolvent and placed into
receivership, then the FDIC or NCUA—as the receivers—would collect the financial assets of the
insolvent bank or credit union, respectively, and attempt to sel them to other depositories.40 The
proceeds would be used to reimburse depositors. The FHLB’s superlien authority, however, gives
it priority on pledged collateral assets over any and al other creditors, including the FDIC and
NCUA. Should a member fail, the FHLB can sel the pledged collateral to reimburse itself for the
principal and the interest amounts owed.41
FHLB advances may range from overnight to 30 years and can be customized to fit members’
financial needs. For example, some advances contain callable, putable, or convertible option
features.42 A cal able advance gives a member the option to repay an advance ahead of schedule
(on specific dates) without prepayment penalties. A putable advance al ows a member to obtain a
low fixed interest rate advance; but the lending FHLB has the option to “put the advance,”
meaning that the member must repay an outstanding advance or obtain another one at existing
market prices at the time the option is exercised.43 Members may obtain advances with the option
to convert from fixed to floating advance rates (and vice versa). These features may further
enhance the use of advances as a cash management tool to reduce funding risk—especial y for

39 See 12 U.S.C. §1430. Because the FHLBs’ superlien authority was established under the Competitive Equality
Banking Act of 1987 (P.L. 100-86), it may be referred to as the CEBA lien. See FHFA, Advances and Collateral, 2014.
40 See CRS Report R41718, Federal Deposit Insurance for Banks and Credit Unions, by Darryl E. Getter.
41 See GAO, Federal Home Loan Bank System: Key Loan Pricing Terms Can Differ Significantly, GAO-03-937,
September 8, 2003, at https://www.govinfo.gov/content/pkg/GAOREPORT S-GAO-03-973/html/GAOREPORT S-
GAO-03-973.htm.
42 See FHLB of Atlanta, “Types of Advances We Offer,” at https://corp.fhlbatl.com/services/advances/.
43 See FHLB of Indianapolis, “Putable Advances,” at https://www.fhlbi.com/products-services/credit-products/
advances/putable-advances; and SEC, Form 10, Federal Hom e Loan Bank of Chicago, March 31, 2005, at
https://www.sec.gov/Archives/edgar/data/1331451/000119312505135678/d1012g.htm.
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members holding assets with adjustable rates. FHLB advances with option-like features may also
be less expensive relative to some private market interest rate derivative products, which may
benefit smal depositories that lack sufficient volumes to reduce their costs per transaction.44
FHLBs also lend federal funds to depository institutions in the overnight federal funds market.45
Federal funds are excess cash reserves that depositories may lend to each other, usual y overnight
or for several days. Lending federal funds typical y does not require collateral, causing them to be
slightly more expensive relative to collateralized (secured) advances. The pricing difference,
therefore, reflects the credit risk difference between secured and unsecured lending.
In addition to advances and loans of federal funds, other FHLBs’ assets include mortgages that
have been purchased from their members; mortgage-backed securities (MBS) issued by Freddie
Mac and Fannie Mae; securities issued by the U.S. government and its agencies (e.g., Ginnie
Mae46 and federal y backed student loan asset-backed securities); and certain private-label
MBS.47 FHLBs typical y purchase assets in the secondary market, that is, after the loans have
been originated and then sel assets to each other or their member institutions. These assets
purchases can also facilitate the liquidity for mortgages and mortgage-related assets.
FHLBs face some investment restrictions. For example, they are prohibited from trading
securities for speculative purposes or market-making activities. FHLBs also cannot invest in
noninvestment grade debt instruments, and they general y may not invest in certain types of
securities or loans that would represent an ownership interest.48 However, they may hold common
stock in small business investment companies or certain investments targeted to low-income
persons or communities.49
FHLBs have some key off-balance sheet commitments. First, they may issue standby letters of
credit (SLOCs) on behalf of their members. A SLOC is a guarantee by an FHLB, which is issued
for a fee, to honor a payment in the event that an FHLB member is unable to fulfil its
obligations. Prior to issuing a SLOC, an FHLB may perform standard underwriting and impose
collateral requirements as if it were securing an advance.50 Second, FHLBs are jointly and
several y liable for al consolidated obligations, discussed in the following section. In other

44 See FHLB of Dallas, “Credit Products Summary Guide,” at https://fhlb.com/resourcecenter/Documents/Product-
Services/Advances/FHLB-Dallas_Credit_Products_Summary_Guide.pdf.
45 See Gara Afonso, Alex Entz, and Eric LeSuer, “ Who’s Lending in the Federal Funds Market ,” Federal Reserve Bank
of New York, Liberty Street Econom ics, December 2, 2013, at https://libertystreeteconomics.newyorkfed.org/2013/12/
whos-lending-in-the-fed-funds-market.html.
46 Ginnie Mae is the federal agency that facilitates the creation of mortgage-backed securities (MBS) linked to
residential and multifamily mortgages guaranteed by various federal agencies, such as the FHA, Department of
Veterans Affairs, and Department of Agriculture.
47 See FHFA, 2014 Report to Congress, June 15, 2015, at https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/
FHFA_2014_Report_to_Congress.pdf.
48 For example, the FHLBs would not be allowed to invest in common stock or junior tranches of collateralized
mortgage obligations and real estate mortgage investment conduits (REMICs).
49 Small business investment companies (SBICs), which are licensed and regulated by the Small Business
Administration (SBA), provide debt and equity financing to businesses that meet certain SBA size requirements. For
more information, see CRS Report R41456, SBA Sm all Business Investm ent Com pany Program , by Robert Jay Dilger.
50 For example, when a state or local municipality public deposits funds into a federally insured bank, standby letters of
credit may be used to provide insurance that exceeds the $250,000 limit guaranteed by the FDIC if the bank were to
become insolvent. For more information, see Government Finance Officers Association, “Collateralizing Public
Deposits,” September 2019, at https://www.gfoa.org/collateralizing-public-deposits.
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The Federal Home Loan Bank System and Selected Policy Issues

words, if a FHLB fails to satisfy a payment obligation, another FHLB may be cal ed on to repay
al or any part of it, as determined or approved by the FHFA.51
Each FHLB is independently managed with its own board of directors that oversees strategic
business and risk management decisions to achieve mission objectives.52 For this reason, each
FHLB manages its asset portfolio, which may reflect advances with varying features and varying
percentages of permissible investments. Such variations in products and investments may be
influenced by the variation in the needs of the FHLB district members.
FHLB System Liabilities
Liabilities are the borrowings by a lending institution to acquire the funds used to make loans.
The FHLB system issues a range of debt securities via its jointly owned Office of Finance to
collect the funds necessary to make member advances.53 Specifical y, the Office of Finance issues
consolidated bonds and discount notes.54 For the discount notes, the maturities range from 4 to 20
weeks, typical y auctioned in sizes from $500 mil ion to over $5 bil ion each.55 For the bonds, the
maturities range from less than 1 year to 30 years, with the majority of issues between 1 and 5
years.56 Buyers of debt securities issued on behalf of the FHLBs include commercial banks,
central banks, pension funds, private sector investors, government agencies, and individuals.57
Each FHLB is responsible for repaying the principal and interest on the percentage of
consolidated obligations issued on its behalf by the Office of Finance. Any FHLB failing to repay
its share of system liabilities is prohibited from paying dividends to its regional members or
redeeming or repurchasing shares of its stock. Moreover, the FHLBs are jointly and several y
liable for repayment of the total amount of consolidated obligations. For this reason, the FHFA
can require one or more other FHLBs to repay any outstanding obligation.58
The FHLBs’ consolidated obligations do not carry the full-faith-and-credit backing of the federal
government, but debt securities trade at interest rates similar to comparable Treasury debt
issuances due to the FHLB system’s GSE status. Given the federal assistance provided to GSEs—
such as the Farm Credit Banks, Fannie Mae, and Freddie Mac—to meet their debt obligations,
investors in consolidated obligations are likely to believe that an FHLB would not be al owed to

51 See FHLB of Cincinnati, SEC Form 10-K: Federal Home Loan Bank of Cincinnati for the fiscal year ended
Decem ber 31, 2019, at https://www.fhlbcin.com/media/2918/2019-10k.pdf (hereinafter SEC Form 10-K: FHLB of
Cincinnati).
52 For more information about the FHLBs’ boards of directors, see GAO, Federal Home Loan Banks: Information on
Governance, Board Diversity, and Com m unity Lending , GAO-15-435, May 2015, at https://www.gao.gov/assets/680/
670146.pdf.
53 See FHFA, “Board of Directors of the Federal Home Loan Bank System Office of Finance,” 75 Federal Register
23152-23167, May 3, 2010, at https://www.govinfo.gov/content/pkg/FR-2010-05-03/pdf/2010-10075.pdf.
54 See FHFA, Office of Finance, April 2013, at https://www.fhfa.gov/SupervisionRegulation/Documents/
Office_of_Finance_Module_Final_Version_1.0_5 08.pdf.
55 See FHLBs Office of Finance, “About Discount Notes,” at http://www.fhlb-of.com/ofweb_userWeb/pageBuilder/
about-discount-notes-41.
56 See FHLBs Office of Finance, “About Bonds,” at http://www.fhlb-of.com/ofweb_userWeb/pageBuilder/about-
bonds-47.
57 See FHLBs Office of Finance, “About Debt Securities,” at http://www.fhlb-of.com/ofweb_userWeb/pageBuilder/
debt-securities-home-41.
58 T his authority has never been invoked. See SEC Form 10-K: FHLB of Cincinnati.
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fail.59 Hence, the FHLBs can borrow at rates near those of the U.S. Treasury. The text box below
summarizes additional GSE privileges for the FHLB system.
Summary of Government-Sponsored Enterprise Privileges for the FHLB System
Congress has given the Federal Home Loan Bank (FHLB) system certain privileges and exemptions, which include
the fol owing:

a $4 bil ion line of credit with the U.S. Treasury for the FHLB system as a whole (12 U.S.C. §1431);

eligibility of debt (consolidated obligations) for Federal Reserve open market purchases, unlimited investment
by commercial banks and thrifts (12 U.S.C. §24 for banks, §1464 for thrifts, §1767 for credit unions), and
col ateralizing public deposits (12 U.S.C. §1434);

superlien priority on col ateral pledged by member institutions, over any and al other creditors (12 U.S.C.
§1430);

the use of Federal Reserve banks as fiscal agents (12 U.S.C. §1435);

exemption of earnings from federal, state, and local income tax (12 U.S.C. §1433);

exemption of interest paid to investors from state income tax (12 U.S.C. §1433); and

status of debt issues as government securities for purposes of the securities laws (15 U.S.C. §77c).
In sum, the FHLBs’ profits are generated by the differences between the income generated by
their assets and costs of their funds, general y referred to as lending spreads. The FHLBs’ assets
consist primarily of the advances they provide to their member institutions and are funded by
their consolidated obligations. The FHLBs’ GSE status translates into an implied federal
guarantee, which al ows them to borrow at rates closer to Treasury rates and subsequently offer
advances at below-market rates to their members. The risks associated with financial
intermediation necessitate the FHLBs to follow prudential capital and liquidity requirements, as
discussed below.
Regulatory Capital and Liquidity Requirements
A sudden disruption in an FHLB’s cash flow can occur under a variety of circumstances. For
example, commercial banks cannot lend more than 25% of the value of their equity to a single
borrower, but FHLBs are not limited on the amount of advances they can provide to an individual
member.60 Thus, a member failing to repay a large amount of advances can significantly reduce
an FHLB’s cash inflow.61 Because FHLBs’ assets (as wel as the collateral used for many of their
advances) consist of mortgages and mortgage-related products, their cash flows can turn negative
if, for example, property values fal below the outstanding mortgage balances, thereby providing
homeowners with financial incentives to default.62 In these scenarios, cash flow disruptions can

59 GAO, Federal Home Loan Bank System, An Overview of Changes and Current Issues Affecting the System , GAO-
05-489T , April 13, 2005, p.8.
60 See Adam B. Ashcraft, Morten L. Bech, and W. Scott Frame, The Federal Home Loan Bank System: The Lender of
Next-to-Last Resort?, Federal Reserve Bank of New York, Staff Report no. 357, November 2008, at
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr357.pdf (hereinafter Ashcraft, Bech, and
Frame, FHLB System : Lender of Next-to-Last Resort?, 2008).
61 Prior to being owned by JP Morgan Chase, Washington Mutual had accounted for approximately one -third of
lending by the FHLB of Seattle. See DeSilver, “Seattle’s FHLB in Big Money T rouble Again,” 2009; and FDIC,
“JPMorgan Chase Acquires Banking Operations of Washington Mutual,” press release, September 25, 2008, at
https://www.fdic.gov/news/news/press/2008/pr08085.html.
62 T he FHLB of Seattle experienced losses from nonperforming, private-label MBS. See FHFA Office of Inspector
General, Merger of the Federal Hom e Loan Banks of Des Moines and Seattle: FHFA’s Role and Approach for
Overseeing the Continuing FHLBank, WPR-2016-002, March 16, 2016, at https://www.fhfaoig.gov/sites/default/files/
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erode FHLBs’ capital reserves and possibly impede the system’s ability to issue more
consolidated obligations. Furthermore, the demand for advances may suddenly spike—which
happened in 2008 when depository institutions initial y turned to the FHLBs for liquidity rather
than the Federal Reserve’s discount window—and increase the system’s need for liquidity.63
For these reasons, the FHLB system has capital requirements. Specifical y, each member
institution must place a minimum paid-in (rather than publicly traded) capital stock investment as
a condition to become and remain a member of its district FHLB.64 Consequently, members must
be inspected and prudential y regulated under state or federal banking or similar state laws or, in
the case of CDFIs, certified by the CDFI Fund.65 A member institution must be in sound financial
condition to reduce exposing its regional FHLB to greater credit, legal, and operational risks
when engaging in transactions.66
The current FHLB system’s capitalization framework, established in 1999 by the GLBA,
authorizes the FLHBs to issue Class A and Class B stock and defines permanent and total capital
requirements.67
 Class A stock is defined in statute as stock that can be redeemed six months after
filing of a notice by a member.
 Class B stock is defined in statute as stock that can be redeemed five years after
filing of a notice by a member.
 Permanent capital consists of amounts paid by members for Class B stock plus a
FHLB’s retained earnings.
 Total capital is equal to Class A stock plus permanent capital (i.e., Class B stock
plus retained earnings), which must equal at least 4% of an FHLB’s total assets.
 Each FHLB must also comply with a leverage ratio requirement—defined as a
ratio of total capital to total assets—of 5%. To meet this requirement, total capital
must be computed differently. An FHLB begins by multiplying its permanent
capital by 1.5; other components of capital (e.g., Class A stock) are subsequently
added to the result of this computation to obtain the definition of total capital
used to determine the leverage ratio.
 Each bank also must meet a risk-based capital requirement by maintaining
permanent capital in an amount at least equal to the sum of its credit risk, market
risk, and operational risk charges. For the credit risk charge, an FHLB must
multiply each of its assets—on-balance sheet assets, off-balance sheet risk

WPR-2016-002.pdf.
63 See Ashcraft, Bech, and Frame, FHLB System: Lender of Next-to-Last Resort?, 2008. T he recession that began in
December 2007 and ended in 2009 is frequently referred to as the Great Recession. See NBER, “ U.S. Business Cycle
Expansions and Contractions,” at http://www.nber.org/cycles.html; and Federal Reserve Bank of St. Louis “T he
Financial Crisis T imeline,” at https://www.stlouisfed.org/Financial-Crisis.
64 In December 2006, limitations were placed on an FHLB’s ability to increase paid-in capital requirements on its
members. See FHFA, “ Limitation on Issuance of Excess Stock,” 71 Federal Register 78046-78051, December 28,
2006, at https://www.govinfo.gov/content/pkg/FR-2006-12-28/pdf/E6-22325.pdf.
65 See CRS Report R42770, Community Development Financial Institutions (CDFI) Fund: Programs and Policy
Issues, by Sean Lowry.
66 See FHFA, Federal Home Loan Bank Membership, March 2013, at https://www.fhfa.gov/SupervisionRegulation/
Documents/Federal_Home_Loan_Bank_Membership_Module_Final_Version_1.0_508.pdf .
67 See FHFA, “Federal Home Loan Bank Capital Requirements,” 82 Federal Register 30776-30798, July 3, 2017, at
https://www.govinfo.gov/content/pkg/FR-2017-07-03/pdf/2017-13560.pdf.
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exposures, and derivatives contracts—by an applicable risk weight, which is then
summed to obtain the capital charge.68 The market risk charge is calculated as the
maximum loss in an FHLB’s portfolio under various macroeconomic conditions.
The operational risk capital charge is computed by adding the credit and market
risk charges, then multiplying the sum by 30%.
The Office of Finance’s issuance of consolidated obligations can be curtailed when either the
leverage or risk-based capital requirements are not met; thus, satisfying the total demand for
advances is possible only if total FHLB system capital levels keeps pace.69
The FHLB system’s prudential regulator, the FHFA, is required to conduct annual on-site
examinations of the FHLBs and the Office of Finance.70 The FHFA ensures that the FHLBs
follow procedures necessary to mitigate exposure to financial risks. The FHFA can also issue
supervisory letters, supervisory and capital directives, and can restrict payment of dividends to
members. The FHLBs are also stress tested by FHFA, meaning that it develops and approves
various macroeconomic scenarios used to assess the resiliency of the system’s portfolios to
extreme credit and market risk exposures.71
In addition to capital requirements, the FHLBs have liquidity requirements. The FHLBs’ assets
tend to have longer maturities (i.e., dates when the loans are expected to be repaid in full) relative
to the maturities of their shorter-term liabilities, which is typical y true for most financial
intermediaries. Even if an FHLB’s assets are performing, circumstances may arise when the
timing of the expected cash inflows does not perfectly match the timing of expected cash
outflows, resulting in an evaporation of liquidity. For the FHLBs, a sudden loss of liquidity might
trigger intervention by Treasury or the Federal Reserve to purchase consolidated liabilities.
On August 2018, the FHFA required the FHLBs to increase their liquidity positions, which would
enhance their abilities to continue operations over longer time periods without accessing capital
markets or intervention by the federal government.72 The FHFA established standardized
calculations that each FHLB must use to determine acceptable liquidity positions. Specifical y,
the funding gap calculation expresses the difference between an FHLB’s assets and liabilities that
are scheduled to mature during specified periods (e.g., three month, one year) as a percentage of
its total assets. The FHLBs’ funding gaps are subsequently monitored to stay within the set ranges

68 T he applicable risk weight for a particular asset or item is referred to as a credit risk percentage requirement (CRPR).
T he FHFA revised the process used to determine the appropriate CRPRs for corresponding assets. For more
information, see FHFA, “Federal Home Loan Bank Capital Requirements,” 84 Federal Register 5308-5333, February
20, 2019, at https://www.govinfo.gov/content/pkg/FR-2019-02-20/pdf/2018-27918.pdf.
69 See FHFA, Office of Finance, April 2013, at https://www.fhfa.gov/SupervisionRegulation/Documents/
Office_of_Finance_Module_Final_Version_1.0_508.pdf ; and James T homson and Matthew Koepke, Federal Hom e
Loan Banks: The Housing GSE that Didn’t Bark in the Night? , Federal Reserve Bank of Cleveland, September 23,
2010, at https://www.clevelandfed.org/en/newsroom-and-events/publications/economic-trends/economic-trends-
archives/2010-economic-trends/et-20100923-federal-home-loan-banks-the-housing-gse-that -didnt-bark-in-the-
night.aspx.
70 Federal Housing Enterprises Financial Safety and Soundness Act of 1992, (P.L. 102-550, T itle XIII, as amended by
the Housing and Economic Recovery Act of 2008 [P.L. 110-289]).
71 See FHFA, “Federal Home Loan Bank Stress T ests for Market and Credit Risk,” at https://www.fhfa.gov/DataT ools/
Downloads/Pages/Federal-Home-Loan-Bank-Stress-T ests-for-Market-and-Credit-Risk.aspx.
72 See FHFA, Federal Home Loan Bank Liquidity Guidance, AB 2018-07, August 23, 2018, at https://www.fhfa.gov/
SupervisionRegulation/AdvisoryBulletins/AdvisoryBulletinDocuments/AB-2018-07-FHLB-Liquidity-Guidance.pdf
(hereinafter FHFA, FHLB Liquidity Guidance, 2018).
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over the set time horizons, thus ensuring sufficient cash flow in case of events that may threaten
liquidity.73
Mission Goals
The FHLBs are required to administer the following community development programs:74
 Affordable Housing Program (AHP). Each FHLB district has an AHP,
established to provide grants to membership institutions on a competitive basis.
Each FHLB sets aside 10% of its annual net earnings to fund its AHP. The funds
are used to support the acquisition, construction, or rehabilitation of affordable
rental housing in its district.75 The AHPs may also support owner-occupied
(single family) housing projects, particularly those for veterans, people with
disabilities, and young adults transitioning out of foster care.76
 Community Investment Program (CIP). The CIP al ows member institutions
to receive discounted advances to facilitate the purchase, construction, or
rehabilitation of residential and housing developments in areas that meet certain
eligibility requirements, such as having an area median income at or below a
threshold to benefit low-income residents.77
 Community Investment Cash Advance (CICA). The CICA al ows member
institutions to receive discounted advances to facilitate broader community and
economic development, which might include commercial, industrial, and
manufacturing projects, as wel as social services and public facilities.78 The
collateral for these loans may include smal business loans, smal farm loans,
smal agribusiness loans, and community development loans fully secured by

73 T he FHFA funding gap calculation results in a negative number. Consequently, the funding gap requirements for the
FHLBs established by the FHFA fall within the range of -10% to -20% for the three-month horizon and -25% to -35%
for the one-year horizon. For more information on the formulas and requirements, see FHFA, FHLB Liquidity
Guidance, 2018.
74 See FHFA, Low-Income Housing and Community Development Activities of the Federal Home Loan Bank System ,
2011, at https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2011_Low-
IncomeHousingandCommDevoftheFHLBS_508.pdf ; and Office of Finance, “ Affordable Housing Programs,” at
http://www.fhlb-of.com/ofweb_userWeb/pageBuilder/affordable-housing-programs-33.
75 For an example of an FHLB Affordable Housing Program (AHP) and how a member institution would apply for a
grant, see FHLB of Indianapolis, “ Affordable Housing Program,” at https://www.fhlbi.com/products-services/
community-investment-and-housing/affordable-housing-program/; and FHLB of Indianapolis, “ Applying for
Affordable Housing Program (AHP) Grants,” at https://www.fhlbi.com/products-services/community-investment-and-
housing/affordable-housing-program/applying-for-ahp. T he FHLBs report their AHP activities on their websites, all of
which are available at http://www.fhfb.gov.
76 See FHFA, “Affordable Housing Program Amendments,” 83 Federal Register 61186-61247, November 28, 2018;
and FHLB of Dallas, “ Subject: Expanded Criteria for Housing Assistance for Veterans Program (HAVEN) ,” Bulletin
no. 2019-03, March 1, 2019, at https://www.fhlb.com/membership/Pages/Expanded-Criteria-for-Housing-Assistance-
for-Veterans-Program-(HAVEN).aspx.
77 For an example of the criteria that would qualify for a discounted advance, see FHLB of Indianapolis, “Community
Investment Program”, at https://www.fhlbi.com/products-services/community-investment-and-housing/community-
and-economic-development/community-investment-program.
78 See FHLB of Cincinnati, “Community Investment Cash Advances,” at https://www.fhlbcin.com/housing-programs/
community-investment-cash-advances/.
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collateral other than real estate, as wel as securities representing a whole interest
in such loans.79
The FHFA also establishes housing mission goals for the FHLB system.80 On June 3, 2020, the
FHFA finalized housing goals pertaining to the system’s Acquired Member Assets (AMA)
program.81 In the AMA program, an FHLB is able to purchase mortgage originations from its
members and either hold or sel them in the secondary market. The final rule establishes a target
level of 20% of an FHLB’s total AMA purchases to consist of mortgages originated for LMI
households.82 The final rule also establishes a smal member participation goal of 50% of AMA
program participants. This rule is designed to encourage smal institutions, which typical y lack
the necessary volume and scale to make effective use of secondary mortgage markets, to
participate in the AMA program, particularly those primarily serving LMI families in LMI areas.
The final rule al ows the FHLBs flexibility to request alternative target levels for either or both
goals from the FHFA if changing financial conditions would likely reduce the feasibility of
meeting existing targets.83
Policy Issues
Because the FHLBs were initial y established to facilitate mortgage market liquidity, policy
discussions tend to focus on the system’s overal effectiveness in fulfil ing its original mission,
particularly as its structure has continued to evolve. Specifical y, Congress expanded FHLB
membership eligibility to include commercial banks and removed the minimum mortgage asset
requirement of 10% (see “Instability in the Commercial Banking Sector”).84 Consequently, FHLB
members no longer need to be principal y engaged in mortgage financing. Some financial firms

79 See FHFA, Report on Collateral Pledged to Federal Home Loan Banks: Prepared for the Senate Committee on
Banking Housing and Urban Affairs and the House Committee on Financial Services, August 5, 2016, at
https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2016_FHLBank-Collateral-Report.pdf. Some FHLBs have
specialized names for their advance programs that would support disaster relief and small business assistance. See
FHLB of Dallas, “Grants and Advances that Fund Hope,” at https://www.fhlb.com/community/Pages/Community-
Investment.aspx.
80 T he director of the FHFA is required to “establish housing goals with respect to the purchase of mortgages, if any, by
the [FHLBs].” (12 U.S.C. §1430c(a)).
81 See FHFA, “ Federal Home Loan Bank Housing Goals Amendments Final Rule,” June 25, 2020, at
https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Federal-Home-Loan-Bank-Housing-Goals-Amendments-
Final-Rule.aspx. T he Mortgage Purchase Program and the Mortgage Partnership Finance Program are two types of
Acquired Member Assets (AMA) programs. For more information, see FHFA, “ Fact Sheet: Final Rule on Federal
Home Loan Bank Housing Goals,” at https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/FHLBank-
Housing-Goals-Fact-Sheet -Final-rule.pdf.
82 T he final rule combines the existing regulation’s four separate retrospective mortgage goals into a single prospective
mortgage purchase housing goal. T he four goals are for home purchase mortgages for low-income families; home
purchase mortgages for low-income areas; home purchase mortgages for very low-income families; and refinancing
mortgages for low-income families.
83 T he final rule also applies the housing goals to each FHLB that acquires any AMA mortgages during a year, thus
eliminating a previously existing $2.5 billion volume threshold that previously triggered the application of housing
goals for each FHLB.
84 12 C.F.R. Part 1263 of FHFA regulations establishes eligibility requirements, a membership application process, and
capital stock requirements for FHLB membership, as well as procedures for the termination of FHLB membership
(including the liquidation of member indebtedness, settlement of outstanding business transactions, and redemption or
repurchase of capital stock), in the event of voluntary withdrawal from membership, involuntary termination of
membership, or a merger or consolidation involving member and nonmember institutions. 12 C.F.R. Part 1263 also
contains provisions governing the readmission of FHLB members, FHLB access to member information, and the
display of official FHLB membership insignia.
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that primarily hold mortgages and mortgage-related assets, however, are not eligible to be FHLB
members. This section discusses the FHLB system’s effectiveness in fulfil ing its mission in light
of current operations and limitations. This section also discusses why certain assets, which may
align with mission goals, may not be considered eligible collateral for FHLB advances.
Mortgage Funding or General Wholesale Funding
Lenders general y rely on rollovers, a continuous sequence of short-term cash borrowings, to fund
loan portfolios. Depositories rely particularly on deposits, which can be seen as sequences of
short-term cash borrowings from depositors and repaid with interest. Instead of relying primarily
on deposits, supplementary short-term funds may be obtained from wholesale funding markets
(sometimes referred to as the interbank market). When depositories borrow and lend short-term
cash to each other, the cash instruments can be in various forms, including federal funds and
brokered deposits.85
Another commonly used wholesale funding instrument is the repurchase agreement, or repo. A
repo is a contract in which one party sel s one or more securities with a commitment to
repurchase the securities on a future date at a higher price, which is equivalent to a collateralized
loan.86 The securities are used as collateral for the cash advance. The repo rate, the interest paid
on the loan, is calculated as the difference between the initial price of the securities and their
repurchase price. Repos are an example of a money market transaction that al ows a financial
institution to utilize some of its il iquid loan assets to obtain cash for other business needs (e.g., to
satisfy its depositors’ demands for cash or to temporarily fund assets scheduled to be sold to other
financial institutions).
Cash advances from federal y-related facilities are fungible or functionally equivalent substitutes
for repo instruments.87 In other words, either advances or repos can be used to borrow liquid
funds. The FHLBs’ GSE status al ows the system to borrow money at rates near those of
comparable Treasury rates and then provide cheaper advances relative to private market repos.
Advances from the FHLBs may have some additional advantages over repos. For example, the
FHLBs may not require additional collateral (i.e., margin cal s) from their members when
financial market conditions change. Members may be al owed to prepay advances and obtain
advances with option-like features without having to purchase additional derivative contracts. The
text box at the end of this section lists some of the other federal or federal y backed institutions
that provide wholesale funding to financial institutions.
The following developments il ustrate the functional equivalency of FHLB advances to the
Federal Reserve’s discount window and to private sector repo transactions.
 During the 2007-2009 recession, lending through the FHLB system increased.
According to the New York Federal Reserve Bank, FHLB advances experienced

85 See Federal Reserve Bank of New York, “Repurchase and Reverse Repurchase Agreement s,” at
https://www.newyorkfed.org/aboutthefed/fedpoint/fed04.html.
86 For more information on repos, see CRS In Focus IF11383, Repurchase Agreements (Repos): A Primer, by Marc
Labonte.
87 By contrast, reverse repo transactions are functionally equivalent to securities lending transactions. In this case, a
lender is providing a safer asset (or cash) in exchange for holding a risk er asset and faces counterparty risk if the
borrower does not repurchase the riskier asset at a higher price. See Nathan Foley-Fisher, Borghan Narajabad, and
Stephane Verani, “Lending to Invest,” unpublished manuscript, March 2018, at https://www.rse.anu.edu.au/media/
2422454/Verani-Paper-2018.pdf.
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a 25% increase from the end of 2005 to the second half of 2007.88 More than half
of the growth in advances can be attributed to 10 FHLB members.89 In addition,
the FHLB system saw an increase in the demand for its consolidated obligations
during the 2007-2009 financial crisis, reflecting a “flight to quality” event in
which risky assets were converted to safe assets (i.e., securities backed by the
U.S. federal government) or liquidated to cash.90 Because FHLB advances are
functional y equivalent to borrowing from the Federal Reserve’s discount
window—but less expensive—FHLB members arguably pay no penalty in the
form of higher fees for possible mismanagement of their liquidity positions.91
 On September 3, 2014, the Office of the Comptroller of the Currency (OCC), the
Federal Reserve, and the FDIC issued a final rule implementing the liquidity
coverage ratio (LCR) standard, which was established by the Basel Committee
on Banking Supervision.92 Large, international y-active banking organizations
are required to hold high-quality liquid assets (HQLA), consisting of cash and
qualified government and corporate debt securities (defined by banking
regulators), which can be converted easily and quickly into cash in an amount
equal to or greater than their projected net cash outflows over a 30-day period.93
Specifical y, a bank’s LCR is defined as a ratio—the numerator consists of its
stock of HQLA, and the denominator consists of its net cash outflows over a 30-
day time period. After the final rule, large banks increased their usage of FHLB
advances to purchase HQLA, which includes FHLB consolidated obligations, to
comply with their LCR requirements.94

88 See Ashcraft, Bech, and Frame, The FHLB System: The Lender of Next-to-Last Resort?, 2008.
89 Washington Mutual, Bank of America, and Countrywide were the largest FHLB borrowers over this period.
Anecdotally, these institutions had planned to sell loans to be securitized; however, the disruption of the secondary
mortgage markets prevented the sales, prompting a rise in the demand for FHLB advances to fund the loans that stayed
in their asset portfolios. See Ashcraft, Bech, and Frame, The FHLB System : The Lender of Next-to-Last Resort?, 2008.
For more about the disruption in the credit markets in 20 07, see David Greenlaw et al., “ Leveraged Losses: Lessons
from the Mortgage Market Meltdown,” paper prepared for the U.S. Monetary Policy Forum, New York, NY, February
2008, at http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.160.4646&rep=rep1&type=pdf.
90 See OCC, Federal Reserve System, and FDIC, “Liquidity Coverage Ratio: Liquidity Risk Measurement Standards;
Final Rule,” 79 Federal Register 61440-61541, October 10, 2014, at https://www.occ.treas.gov/news-issuances/
federal-register/2014/79fr61440.pdf.
91 See Stephen G. Cecchetti and Piti Disyatat, “Central Bank T ools and Liquidity Shortages,” Federal Reserve Bank of
New York, Econom ic Policy Review, vol. 16, no. 1 (August 2010), pp. 29 -42, at https://www.newyorkfed.org/
medialibrary/media/research/epr/10v16n1/1008cecc.pdf; and Stojanovic, Vaughan, and Yeager, “ Do FHLB
Membership and Advances Increase Bank Risk -T aking?,” 2008, pp. 680-698.
92 See OCC, Federal Reserve System, and FDIC, “Liquidity Coverage Ratio: Liquidity Risk Measurement Standards;
Final Rule,” 79 Federal Register 61440-61541, October 10, 2014.
93 Except for certain circumstances, banks covered by this rule are defined as large, internationally-active banking
organizations with $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet
foreign exposure, as well as consolidated subsidiary depository institutions of these banking organizations with $10
billion or more in total consolidated assets.
94 T he share of commercial banks with assets over $50 billion accounted for approximately 50% of FHLB advances by
the end of 2016, which is significantly higher than their share of 2% in 2000. See Stefan Gissler and Borghan
Narajabad, “ T he Increased Role of the Federal Home Loan Bank System in Funding Markets, Part 2: Recent T rends
and Potential Drivers,” Board of Governors of the Federal Reserve System, FEDS Notes, October 18, 2017, at
https://www.federalreserve.gov/econres/notes/feds-notes/the-increased-role-of-the-federal-home-loan-bank-system-in-
funding-markets-part -2-20171018.htm (hereinafter Gissler and Narajabad, “ T he Increased Role of the FHLB System in
Funding Markets,” 2017).
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 In 2016, the Securities and Exchange Commission removed an exemption that
al owed institutional money market funds (MMFs) to maintain a stable net asset
value (NAV); instead, MMFs were to sel and redeem shares based on the current
market value of the securities in their underlying portfolios, thus conducting
transactions at a floating NAV.95 In response, MMFs shifted $1.2 tril ion from
prime funds with floating NAVs (e.g., those consisting of commercial paper) to
government funds, which are largely restricted to holding Treasury and agency
securities—including FHLBs’ consolidated obligations—to appeal to fixed rate
investors preference of funds with more stable NAVs.96 In sum, given the LCR
and NAV regulations, the FHLBs—while intermediating between large banks and
MMFs—arguably have become a functional y equivalent alternative to private
sector repo instruments for both parties as they comply with the recent
regulations.97
In sum, whether the FHLB system specifical y facilitates mortgage funding or simply provides
wholesale funding at below-market rates is debatable because the funding of assets is a fungible
activity.98 Lenders arguably focus on collectively funding their entire asset portfolios rather than
funding each asset individual y. Although the FHLB advances may reduce the costs to fund a
particular category of loans held in asset portfolios, the overal effect may translate into a subsidy
that reduces a portion of the total wholesale funding costs, which otherwise would be borne by a
member institution.
On the one hand, the fungible nature of the FHLBs’ wholesale lending may contribute to
increasing financial risks for taxpayers. For example, by providing loans to WaMu, the FHLB of
Seattle’s exposure to concentration risk (i.e., exposure to a single or predominant source of risk)
increased, which arguably may be associated with lending to large bank holding companies.99

95 For periods of heavy redemption requests, the Securities and Exchange Commission also provided Money Market
Fund (MMF) boards of direct ors with tools to suspend such requests (i.e., impose gates) and levy redemption fees. See
SEC, “Money Market Fund Reform; Amendments to Form PF; Final Rule,” 79 Federal Register 47736-47983, August
14, 2014, at https://www.govinfo.gov/content/pkg/FR-2014-08-14/pdf/2014-17747.pdf.
96 See Gissler and Narajabad, “ T he Increased Role of the FHLB System in Funding Markets,” 2017; Kenechukwu
Anadu and Viktoria Baklanova, The Intersection of U.S. Money Market Mutual Fund Reform s, Bank Liquidity
Requirem ents, and the Federal Hom e Loan Bank System , Federal Reserve Bank of Boston, Working Paper RPA 17 -05,
October 31, 2017 (hereinafter Anadu and Baklanova, The Intersection of U.S. MMF Reform s, Bank Liquidity
Requirem ents, and the FHLB System , 2017); and Sabastian Ramos, ICD Com m entary: Operational and Accounting
Issues with the Floating NAV and the Im pact on Money Market Funds, SEC, Institutional Cash Distributors, LLC, July
2013, at https://www.sec.gov/comments/s7-03-13/s70313-40.pdf. For more information on MMF holdings, see “ Money
Market Funds: Investment Holdings Detail,” at https://www.federalreserve.gov/releases/efa/efa-project-money-market-
funds-investment -holdings-detail.htm.
97 See Gissler and Narajabad, “ T he Increased Role of the FHLB System in Funding Markets,” 2017; Anadu and
Baklanova, The Intersection of U.S. MMF Reform s, Bank Liquidity Requirem ents, and the FHLB System , 2017; and
David Andolfatto and Jane Ihrig, “ Why the Fed Should Create a Standing Repo Facility,” Federal Reserve Bank of St.
Louis, On the Econom y, March 6, 2019, at https://www.stlouisfed.org/on-the-economy/2019/march/why-fed-create-
standing-repo-facilit y.
98 See W. Scott Frame, Diana Hancock, and Wayne Passmore, “Federal Home Loan Bank Advances and Commercial
Bank Portfolio Composition,” Journal of Money, Credit and Banking, vol. 44, no. 4 (June 2012), pp. 681-684.
99 According to the FHFA Office of Inspector General, the top four large bank holding companies—Bank of America,
Citigroup, J.P. Morgan Chase, and Wells Fargo —accounted for one quarter of aggregate advances at the end of 201 3.
See FHFA Office of Inspector General, Recent Trends in Federal Hom e Loan Bank Advances to JPMorgan Chase and
Other Large Banks, Evaluation Report EVL-2014-006, April 16, 2014, at https://www.fhfaoig.gov/Content/Files/EVL-
2014-006_1.pdf; and FHFA, 2014 Report to Congress, Figure 4, June 15, 2015, at https://www.fhfa.gov/AboutUs/
Reports/ReportDocuments/FHFA_2014_Report_to_Congress.pdf.
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Concentration risk may amplify other financial risks. A sudden change in interest rates affecting
the cash flows of one or more of the large bank members, for example, could threaten the timely
repayment of outstanding FHLB advances and overal solvency of a district FHLB if the balances
owed are relatively large.
On the other hand, providing advances to the largest banks generates significant revenues for the
FHLBs, which does support the system’s affordable housing mission.100 Moreover, the revenues
generated by the large members are arguably more stable relative to those generated by smal er
members, which have substantial y lower volumes of lending activity. Furthermore, WaMu’s
portfolio consisted predominately of mortgage assets and, therefore, was less diversified. By
contrast, large commercial banks engage in more diversified lending portfolios and financial
activities, arguably reducing the amount of concentration risk transferable to the FHLB system.
The largest U.S. banking firms are also now required to hold larger amounts of HQLA and capital
buffers to increase their resiliency to adverse financial and macroeconomic events.101 Hence, the
FHLBs’ concentration risk exposure may be dampened in light of greater prudential requirements
for larger member institutions.

100 In addition, the increased demand for the FHLBs’ consolidated obligations subsequently lowers the system’s cost of
funds. See Jonathan Adams-Kane and Jakob Wilhelmus, The Real Story Behind the Surge in Federal Hom e Loan Bank
Advances: Macroeconom ic Policy Changed How Banks Borrow, Milken Institute, September 2017, at
https://milkeninstitute.org/sites/default/files/reports-pdf/092117-WP-MMFs-and-FHLB-1.pdf.
101 See CRS Report R44573, Overview of the Prudential Regulatory Framework for U.S. Banks: Basel III and the
Dodd-Frank Act, by Darryl E. Getter.
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Federal Wholesale Funding Institutions
Examples of federal wholesale funding facilities established for certain lending institutions are below.

The Federal Reserve System was established by the Federal Reserve Act of 1913 (P.L. 63-43, 38 Stat 251)
with a discount window initial y to provide liquidity for its commercial bank members.102 Today, al
depository institutions may establish borrowing privileges at the discount window.103 The Federal Reserve
banks provide depository institutions with three types of discount window lending programs, each with its
own interest rate (“discount rate”): (1) primary credit (a short-term source of credit available to general y
sound depository institutions on a very short-term basis as a backup rather than a regular source of funding);
(2) secondary credit (typical y overnight at a higher rate than primary credit, haircuts are typical y applied to
the col ateral); and (3) seasonal credit (primarily for smal depository institutions with demonstrated liquidity
pressures of a seasonal nature, not normal y available to institutions with deposits of $500 mil ion or
more).104 Each Federal Reserve Bank’s board of directors sets the discount rates, subject to the review and
determination of the Board of Governors of the Federal Reserve System. Al discount window loans must be
col ateralized to the satisfaction of the lending Federal Reserve bank. The Federal Reserve’s discount window
was designed for use as an emergency backup, as opposed to regular source funding,105 hence, lending at a
penalty rate that is likely to be more expensive than the other federal wholesale funding facilities.

The Federal Home Loan Bank (FHLB) system, as discussed in this report, provides cash advances for its
members. Depositories arguably view the FHLB advances as a preferred alternative to borrowing from the
Federal Reserve’s discount window. FHLB advances can be used for regular source funding, are relatively less
expensive, and carry less stigma regarding the liquidity needs of the borrowing institution.106 The FHLBs
themselves do not have access to the Federal Reserve’s discount window, but the Federal Reserve may
purchase the FHLBs’ consolidated liabilities.

The central liquidity facility (CLF), which exists within and is managed by the National Credit Union
Association, is the wholesale liquidity lender to the credit union system.107 Fol owing the significant decline in
credit union liquidity between 1971 and 1978 due to Regulation Q, the CLF was created in 1979.108 The CLF,
similar to the FHLB system, is owned by its member credit unions. The CLF may lend up to the statutory
limit of 12 times its subscribed capital stock and surplus. Due to Coronavirus Disease 2019 (COVID-19), the
CLF lending limit has been temporarily increased, through December 31, 2020, to 16 times its subscribed
capital stock.109 Credit unions may stil borrow from the FHLBs and the Federal Reserve’s discount
window.110

The Farm Credit System (FCS) is a nationwide financial cooperative that is a government-sponsored
enterprise.111 The FCS has four district wholesale banks: AgFirst, AgriBank, CoBank, and the Farm Credit
Bank of Texas.112 The FCS’s Federal Farm Credit Banks Funding Corporation, which is analogous to the
FHLBs’ Office of Finance, issues debt securities on behalf of the FCS institutions.113

Due to the COVID-19 pandemic, the Federal Housing Finance Agency authorized two government
sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, to provide dol ar rol transactions to al ow
investors to sel their mortgage-backed securities (MBS) to either GSE in exchange for cash with an
agreement to repurchase a similar MBS at some future date, which is analogous to a repo transaction.114
Nonbanks and Captive Insurance Companies
Not al financial institutions that participate in the mortgage industry are eligible to become
members of a district FHLB, including those listed below.

102 See T homas M. Humphrey, “ T he Real Bills Doctrine,” Federal Reserve Bank of Richmond, Economic Review,
September/October 1982, at https://www.richmondfed.org/-/media/richmondfedorg/publications/research/
economic_review/1982/pdf/er680501.pdf; and Clay J. Anderson, Evolution of the Role and the Functioning of the
Discount Mechanism , Federal Reserve Bank of Philadelphia, Fundamental Reappraisal of the Discount Mechanism,
November 1966, at https://fraser.stlouisfed.org/files/docs/historical/federal%20reserve%20history/discountmech/
evolrole_ander.pdf.
103 See Pam Hendry, “ T he Federal Reserve’s Discount Window: What It Is and How It Works,” Federal Reserve
System, Com m unity Banking Connections, Second Issue 2016, at https://www.communitybankingconnections.org/
articles/2016/i2/federal-reserve-discount -window.
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 Nondepository Firms. In addition to depositories, nondepository firms engage
in originating and servicing mortgages. Nondepository firms originate single-
family residential mortgages for a fee on behalf of an ultimate lender, which
owns the loan and rights to the repayment of principal and interest. These
originators may also service mortgages (i.e., perform various administrative tasks
for a fee).115 The right to earn income for servicing a mortgage, the mortgage
servicing right (MSR), is an asset for a mortgage servicer. Following revisions to
their capital requirements in 2013, some banks reduced the amount of MSRs they
were wil ing to hold.116 According to the Federal Reserve, nonbanks purchased
more than $500 mil ion MSRs from banks in bulk sales.117 As of April 2020,
nonbank mortgage servicers hold MSRs for approximately 50% of the federal y
insured mortgage market, which includes Fannie Mae, Freddie Mac, and Ginnie

104 T he general policies that govern discount window lending may be found in the Federal Reserve’s Regulation A. See
Federal Reserve, “Discount Window Lending,” at https://www.federalreserve.gov/regreform/discount-window.htm;
Federal Reserve Bank of New York, “Discount Window,” at https://www.newyorkfed.org/banking/discountwindow;
and Federal Reserve Banks, “Lending,” Operating Circular, no. 10 (July 2013), at https://www.frbservices.org/assets/
resources/rules-regulations/071613-operating-circular-10.pdf.
105 See Stojanovic, Vaughan, and Yeager, “Do FHLB Membership and Advances Increase Bank Risk-T aking?,” 2008,
pp. 680-698.
106 See Mark Carlson and Jonathan D. Rose, “ Stigma and the Discount Window,” Board of Governors of the Federal
Reserve System, FEDS Notes, December 19, 2017, at https://www.federalreserve.gov/econres/notes/feds-notes/stigma-
and-the-discount -window-20171219.htm.
107 National Credit Union Association (NCUA), “Central Liquidity Facility,” at https://www.ncua.gov/support-services/
central-liquidity-facility.
108 Harold Black and Robert H. Dugger, “Credit Union Structure, Growth and Regulator y Problems,” Journal of
Finance, vol. 36, no. 2 (May 1981), pp. 529 -538. Regulation Q interest rate ceilings, which stemmed from the Banking
Act of 1933 (48 Stat. 162) and the Banking Act of 1935 (49 Stat. 684), imposed interest rate ceilings on time and
savings deposits.
109 See NCUA, “Enhancements to Central Liquidity Facility Membership and Borrowing Authority,” press release,
April 20, 2020, at https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/enhancements-
central-liquidity-facility-membership-and-borrowing-authority.
110 See NCUA, “Your Credit Union’s Contingent Liquidity and the Central Liquidity Facility Frequently Asked
Questions,” August 2012, at https://www.ncua.gov/files/letters-credit-unions/LCU2012-10Encl.pdf.
111 See CRS Report RS21278, Farm Credit System , by Jim Monke; and David Nickerson and Ronnie J. Phillips,
“Financial Deja Vu?: T he Farm Credit System’s Past Woes Could Strike the Federal Home Loan Bank Syst em,”
Regulation, vol. 25, no. 1 (Spring 2002), pp. 40 -45.
112 See Farm Credit System, “Our Structure: List of Farm Credit Organizations,” at https://farmcredit.com/our-
structure.
113 See Federal Farm Credit Banks Funding Corporation, “Funding the Farm Credit System,” at
https://www.farmcreditfunding.com/ffcb_live/index.html.
114 See FHFA, “FHFA Authorizes the Enterprises to Support Addit ional Liquidity in the Secondary Mortgage Market,”
press release, March 23, 2020, at https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Authorizes-the-Enterprises-
to-Support -Additional-Liquidity-in-the-Secondary-Mortgage-Market.aspx.
115 A mortgage servicer collects and remits the principal and interest payments to the mortgage lender; manages the
borrower’s escrow account; processes the loan title once paid in full; and administers loss mitigation (e.g., forbearance
plans) or foreclosure resolution on behalf of the lender if the borrower falls behind or fails to make full payment.
116 See CRS Report R44573, Overview of the Prudential Regulatory Framework for U.S. Banks: Basel III and the
Dodd-Frank Act, by Darryl E. Getter.
117 See Board of Governors of the Federal Reserve System, FDIC, OCC, NCUA, Report to Congress on the Effect of
Capital Rules on Mortgage Servicing Assets, June 2016, at https://www.federalreserve.gov/publications/other-reports/
files/effect -capital-rules-mortgage-servicing-assets-201606.pdf.
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Mae.118 Thus, the mortgage industry has seen a rise in participating nonbank
firms.
 Real Estate Investment Trusts (REITs). A REIT is a real estate company that
would otherwise be taxed as a corporation, except that it meets certain tests and
faces numerous restrictions.119 For example, a REIT must have at least 75% of its
assets and gross income in real estate and distribute at least 90% of profits to
shareholders. Mortgage REITs invest in residential, multifamily, and commercial
mortgage assets, as wel as MBS.120 Repos are the principal source of funding for
mortgage REITs.121
Many of these nondepository firms are unable to join the FHLB system because they lack a
primary prudential federal or state regulator or certification as a CDFI. If a member is not
regularly examined for safety and soundness, then the increased default risk on advances may
threaten the financial condition of the issuing FHLB and increase the financial hardship on other
member institutions in the cooperative.
Prior to 2016, mortgage REITs were able to join the FHLB system and access advances to obtain
funding by creating “captive insurance companies” (captives).122 In 2016, the FHFA rescinded the
eligibility of captive insurers affiliated with mortgage REITs, forcing them to terminate their
FHLB memberships by early 2021.123 The FHFA noted that the prudential regulation of captive
insurers was different from traditional commercial insurance companies that sel insurance to the
public at large.124 Moreover, the financial risks of FHLB lending to insurance companies are
general y higher relative to depositories.125 The superlien protects an FHLB’s financial interest by

118 See Letter from John W. Ryan, president and CEO of the Conference of State Bank Supervisors, to T he Honorable
Maxine Waters, chairwoman of the House Financial Services Committee, T he Honorable Mike Crapo, chairman of the
Senate Banking Committee, T he Honorable Patrick McHenry, ranking member of the House Financial Services
Committee, and T he Honorable Sherrod Brown, ranking member of the Senate Banking Committee, April 15, 2020, at
https://www.csbs.org/sites/default/files/2020-04/CSBS%20Letter%20COVID19%20Apr%2020f.pdf .
119 For more information, see CRS Report R44421, Real Estate Investment Trusts (REITs) and the Foreign Investment
in Real Property Tax Act (FIRPTA): Overview and Recent Tax Revisions, by Jane G. Gravelle.
120 Equity Real Estate Investment T rusts (REIT s) own and operate multifamily and commercial properties. Multifamily
properties—structures designed to house five or more family units—include traditional apartment buildings, subsidized
housing, and housing for seniors and students. Commercial properties include buildings used for offices, retail
businesses, hotels and motels, industrial warehouses, and other business purposes. For more information, see CRS
Report R46480, Multifam ily Housing Finance and Selected Policy Issues, by Darryl E. Getter.
121 See Mortgage Bankers Association, Restore Mortgage REIT Access to Federal Home Loan Bank Advances, at
https://www.mba.org/Documents/Policy/Issue%20Briefs/REIT s_FHLBs.pdf.
122 A captive insurance company (captive) is a licensed insurance company created and wholly owned by a parent
company t o insure itself against various business risks that might be insured by a separate commercial insurance entity.
In other words, captive insurance is a form of self-insurance, and captives are subject to state reporting, capital, and
reserve requirements established for insurance companies. See National Association of Insurance Commissioners,
“Captive Insurance Companies,” February 27, 2020, at https://content.naic.org/cipr_topics/
topic_captive_insurance_companies.htm; and Captive Insurance News, “ What is Captive Insurance,” at
https://www.captive.com/news/2018/08/08/what -is-captive-insurance.
123 See FHFA, “Members of Federal Home Loan Banks,” 18 Federal Register 12, January 20, 2016, at
https://www.govinfo.gov/content/pkg/FR-2016-01-20/pdf/2016-00761.pdf.
124 T he FHFA states that it does not pass judgement on the adequacy of captive insurance regulation, particularly for
individual captives that were organized for specific business purposes. See FHLB, “ Final Rule: Federal Home Loan
Bank Membership FAQs,” at https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/FAQs-for-Final-
Rule_01-12-16.pdf; and FHFA, “ Members of Federal Home Loan Banks,” 18 Federal Register 12, January 20, 2016.
125 See FHFA, Report on Collateral Pledged to Federal Home Loan Banks: Prepared for the Senate Committee on
Banking, Housing and Urban Affairs and the House Committee on Finan cial Services, August 5, 2016, at
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placing its claims ahead of the FDIC or NCUA if a failed depository is placed into receivership.
Insurance companies, however, are regulated by applicable state laws. State insurance regulators,
for example, limit the collateral amounts that insurance companies can pledge to secure FHLB
advances. Insolvent insurance companies, which are not federal y insured, would also be required
to go through a state receivership process. Whether the superlien authority would protect any
FHLB’s claims on assets used to secure advances is uncertain. Consequently, the FHLBs
typical y require physical delivery of the collateral pledged by eligible member insurance
companies prior to providing them with advances. Hence, the particular risks associated with
lending to insurance companies factored into the FHFA’s 2016 decision to deny captives
eligibility as FHLB members.
In September 2019, Treasury recommended, among other things, that the FHFA consider whether
expanded access to the FHLB system would be warranted in certain circumstances.126 For this
reason, the FHFA is currently revisiting its membership eligibility requirements.127
Collateral Eligibility Issues: Mortgage Servicing Rights,
Guaranteed Portions of Small Business Administration Loans
As previously noted, MSRs are not accepted by the FHLBs as eligible collateral that can be
pledged for advances. MSRs are valued as the discounted sum of projected future cash flows,
which are calculated using the expected cash flows generated from the underlying mortgage asset.
The risks to an MSR’s cash flows are linked to the risks of the underlying mortgage asset.128 If,
for example, interest rates were to decline and cause an increase in mortgage prepayment risk,
then the value of the linked MSRs would also decline in anticipation of future cash payments
being terminated. During March and April 2020, following a drop in interest rates, MSR values
fel 50%-60%.129 Borrowers can also default on their mortgages, terminating the cash flows that
would have been generated by the assets and linked MSRs. The costs to service a defaulted
mortgage would also increase substantial y.130 For these reasons, the volatility of MSR values
reflect the inherent volatility of their anticipated cash flows.
Given the high volatility of MSR values, the FHLBs would need to require larger haircuts if these
MSR assets were used as eligible collateral to mitigate losses. In addition, the FHLBs would need
to acquire servicing licenses or have contractual arrangements already in place in case they would
need to take possession of MSRs following the default of a member institution.131 Given the
chal enges for the FHLBs if MSRs were used as collateral, nonbanks that lack portfolios of

https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2016_FHLBank-Collateral-Report.pdf.
126 See T reasury, Housing Finance Reform Plan: Pursuant to the Presidential Memorandum Issued March 27, 2019 ,
HUD, at https://home.treasury.gov/system/files/136/HUD-Housing-Finance-Reform-Plan-September-2019.pdf.
127 See FHFA, Federal Home Loan Bank Membership: Request for Input, February 2020, at https://www.fhfa.gov/
Media/PublicAffairs/PublicAffairsDocuments/RFI-on-FHLBank-Membership.pdf.
128 See CRS Insight IN11377, Mortgage Servicing Rights and Selected Market Developments, by Darryl E. Getter.
129 See Karan Kaul and Laurie Goodman, Should Non-Bank Mortgage Companies Be Permitted to Become Federal
Hom e Loan Bank Mem bers?, Urban Institute, Housing Finance Policy Center, June 2020, at https://www.urban.org/
sites/default/files/publication/102400/should-nonbank-mortgage-companies-be-permitted-to-become-federal-home-
loan-bank-members.pdf (hereinafter Kaul and Goodman, Should Non-Bank Mortgage Com panies Be Perm itted to
Becom e FHLB Mem bers?, 2020).
130 See Laurie Goodman, “ Servicing Costs and the Rise of the Squeaky Clean Loan,” Urban Institute, Mortgage
Banking (February 2016), at https://www.urban.org/sites/default/files/publication/77626/2000607-Servicing-Costs-and-
the-Rise-of-the-Squeaky-Clean-Loan.pdf.
131 See Kaul and Goodman, Should Non-Bank Mortgage Companies Be Permitted to Become FHLB Members? , 2020.
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The Federal Home Loan Bank System and Selected Policy Issues

eligible assets (e.g., mortgages) might be unable to obtain advances even if they were granted
FHLB membership.
As previously noted, the GLBA gave FHLBs the ability to use smal business loans as collateral
to secure advances. Some FHLBs, however, are reluctant to accept as eligible collateral the
portions of smal business loans that are federal y guaranteed by the Smal Business
Administration (SBA)—although portions that are not guaranteed by the SBA may stil be
eligible.132 If a member institution were to fail to repay an advance, an FHLB’s superlien
authority could not be used to perfect its security interests on the SBA-guaranteed portion of a
loan.133 Following a review of the relevant statutes, FHFA determined that SBA does not al ow
third parties (i.e., persons who are not SBA-approved lenders) to present and collect on SBA
guarantees.134 The FHLBs might stil be wil ing to al ow the use of SBA-guaranteed loans as
collateral with a large haircut and under extenuating circumstances.
Conclusion
The FHLB system was established to address frequent liquidity shortfal s, or cash flow
disruptions, experienced by mortgage lenders during the Great Depression. It has evolved over
several decades into a system that provides wholesale funding at a discount to member
institutions. While the FHLBs’ activities generate funds to support various affordable housing
needs in their districts, their activities are largely fungible with repo transactions and, therefore,
arguably support overal liquidity needs rather than those specific to mortgage credit markets,
which was the original congressional intent. For this reason, the potential risks of the FHLB
system’s activities to taxpayers has been particularly subject to debate. On the one hand, FHLB
member institutions can bypass the Federal Reserve’s discount window, a tool that alerts
prudential regulators of possible liquidity mismanagement problems for an individual institution
or, in some cases, could alert them of an emerging liquidity crisis that might cause widespread
financial distress. On the other hand, the existence of an additional liquidity source such as the
FHLB system may stil act as a buffer for depositories and sustain financial market liquidity,
thereby al eviating potential costs to taxpayers.

Author Information

Darryl E. Getter

Specialist in Financial Economics

132 See FHLB of Atlanta, “FHLBank Atlanta: Loan Collateral Resource Guide,” at http://corp.fhlbatl.com/files/
documents/loan-collateral-resource-guide.pdf. For more information about the SBA’s 7(a) loan guaranty program, see
CRS Report R41146, Sm all Business Adm inistration 7(a) Loan Guaranty Program , by Robert Jay Dilger.
133 See 13 CFR 120.432(a).
134 See Letter from Andre D. Galeano, deputy director of FHFA, to FHLBs presidents and chief executive officers,
Paycheck Protection Program (PPP) Loans as Collateral for FHLBank Advances, April 23, 2020, at
https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/PPP-Loans-as-Collateral-for-FHLBank-
Advances.pdf. As described in the letter, FHFA allowed the FHLBs to accept PPP loans as collateral for advances after
establishing certain conditions that included haircuts of 20%.
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The Federal Home Loan Bank System and Selected Policy Issues

Acknowledgments
Ted V. Murphy, N. Eric Weiss, Katie Jones, Cheryl Cooper, Andrew Scott, and Jennifer L. Patin made
substantive contributions to this report.

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