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America’s FHLBanks are celebrating their 75th Anniversary - and meeting today’s liquidity challenges

By John R. Price

It was 1932, and The Great Depression was taking a heavy toll. More than a quarter of Americans were out of work. A quarter million homebuyers lost their mortgages. And thousands of banks collapsed.

Reacting, President Herbert Hoover first pushed for establishment of the Reconstruction Finance Corporation to shore up commercial credit and to bolster liquidity for railroads, agriculture, local government and other types of community infrastructure.

Parallel to enactment of the RFC, Hoover continued pressing Congress for action to reduce home loan foreclosures and support the reemergence of widespread homeownership. When Congress passed The Federal Home Loan Bank Act and chartered a network of region-responsive FHLBanks, it breathed new life into Building and Loans (today’s savings and loan associations) and mutual savings banks, setting the stage for a constant stream of low-cost housing finance using private capital, not taxpayer dollars.

While the nation’s recent market turmoil in no way parallels the magnitude of financial hardships experienced during the Depression, left unchecked, the striking evaporation of recent funding sources for housing could have led to potentially calamitous results. Fortunately, providing ready, low-cost liquidity to local lenders in all economic cycles was, and still is, the FHLBanks’ core mission.

From the time the Banks opened their doors on October 15, 1932, to 1989, when Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) and beyond, the FHLBanks have supported a residential lending industry that served Americans through wartime, a postwar building boom, the Baby Boom and into the Internet Era. With FIRREA, Congress mandated an expansion of the Banks’ historic mission to include affordable housing and - importantly - allowed commercial banks to become members of the cooperative in twelve geographic districts.

Recent market turbulence has underscored the significance of the unique ability of the FHLBanks to tap global capital markets and deliver funds efficiently and inexpensively to member financial institutions serving communities across the country. With a combined jump of $110 billion in attractively priced advances (loans to members) from July 31 to August 31 and another $53 billion at the end of September, the independently managed FHLBanks provided critical, low-cost capital to replace previously available sources that retracted in response to market turmoil. In fact, the FHLBanks injected back into the market nearly as much capital during July and August as the Fed and European Central Bank combined.

Issuing debt rated Aaa by Moody’s and AAA by Standard and Poor’s to institutional investors through the Office of Finance, the twelve FHLBanks provided on-the-spot funding of varying durations to owner-members as other sources of liquidity dried up or became more expensive. That is precisely the role Congress envisioned when the Banks opened for business 75 years ago.

As the nation continues to meet the challenges presented by millions of ill-advised mortgages polluting the capital markets - which could yet lead to another downdraft during the next 18 months - the Home Loan Banks stand ready to expand or contract member outstandings to meet customer demand, offer a variety of short- and long-term instruments to fund individual balance sheets and address local needs as diverse as anticipated customer borrowings or assets unable to be sold immediately in the securitized markets. As one local lender recently put it, FHLBank is the “lender of choice” any time it needs liquidity.

So, after 75 years, what’s next? With more than 8,100 members nationwide, more than $1 trillion in assets, more than $800 billion in advances and an Affordable Housing Program whose collective funding of more than $3 billion makes it the equivalent of the largest housing foundation in the country, the FHLBanks are starting to shed their image as the “Stealth GSE.”

While they have proved their mettle as the “anti-credit crunch GSE” this year, FHLBanks must do more to assist their collective membership - smaller community lenders in particular - as they navigate an increasingly perilous world of margin pressures, changes in capital and greater community expectations. For example, FHLBank Pittsburgh is becoming more adaptable by:

• Restructuring the pricing of advances to become even more market-competitive;
• Introducing free software to provide members with additional flexibility in analyzing various advance funding strategies - helping them better manage risk, make more effective funding decisions and engage in more informed use of Bank credit products;
• And working with a growing bipartisan coalition of leaders in Congress to enable FHLBanks to partner once again with members and provide credit enhancement on locally issued tax-exempt bonds for a variety of significant projects - medical clinics, roads and bridges, wastewater treatment, community colleges and the like - without a local bond issue losing its tax-exempt status. This will give FHLBanks statutory parity with other GSEs and various government entities. The drive to amend Section 149 of the Internal Revenue Code is gaining momentum. If successful, cash-strapped municipalities, small colleges and healthcare providers with poor credit ratings or none at all will be able to tap less costly funding. This, in turn, will strengthen communities much the way the FHLBanks have been doing since their creation.

From bust to boom, from market highs to market meltdown, the FHLBanks of America have demonstrated remarkable resilience. By doing the work that Congress chartered them to do 75 years ago, they continue to play a unique role in meeting the liquidity needs of commercial banks, savings associations, thrifts, credit unions and insurance companies and ultimately their respective customers. It’s a partnership that works, and one that works wonders for the nation’s economy.

John R. Price is president and CEO of FHLBank Pittsburgh and incoming Chair of the FHLBank Presidents’ Conference.