Major US Banks May Face Restrictions On Federal Home Loan Banks Use Amid System Overhaul

U.S. officials are contemplating imposing restrictions on the utilization of Federal Home Loan Banks (FHLBs) by major banks, as part of a comprehensive proposal to revamp the system.

The proposed changes would represent the most significant reshaping of the $1.6 trillion system in decades. The Federal Housing Finance Agency (FHFA) may still make adjustments to its plans before announcing recommendations in the coming months, according to sources familiar with the matter. The potential curbing of borrowing capacity for big lenders may also require congressional action.

Federal Home Loan Banks’ Role and Current Issues

The FHLBs have become a contentious issue after lending billions of dollars to banks such as Silicon Valley Bank, Signature Bank, and First Republic Bank, which later collapsed. Originally established during the Great Depression to support home lending, the FHLBs have transformed into a backstop for their members. However, their role in housing finance has diminished over time.

The FHFA initiated a review of the system in 2022, but the recent crisis in March drew greater attention to its expansive role. A report on the review is expected by the end of September, which will include recommendations for Congress and potential regulatory changes. FHFA Director Sandra Thompson has reaffirmed the commitment to release the report by the deadline.

The specific details of the proposed limitations and the banks they would apply to remain unclear. Legislation passed in 1989 allowed almost all banks and credit unions access to the FHLBs. The FHFA may request Congress to increase the percentage of profits that FHLBs allocate to their affordable housing program. Furthermore, regulators have discussed imposing a minimum percentage of assets in mortgages for banks seeking FHLB funding.

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Impact on Large Banks and Recent Collapses

Restricting access for large banks to the FHLBs has been a topic of discussion. Critics view their use of FHLB loans as an unnecessary advantage due to preferential interest rates.

Midsize US lenders that collapsed since March, such as Silicon Valley Bank, Signature Bank, First Republic Bank, and Silvergate Capital Corp., all relied on FHLB borrowing. The collapses have prompted scrutiny and raised questions about the relevance of FHLB loans to their respective businesses

The proposed changes by the FHFA have garnered support, at least among Democrats. Congressman Ritchie Torres (D-NY) expressed concerns during a hearing in May, suggesting that the advances to certain banks seemed unrelated to housing finance. It remains to be seen how the proposed limitations and changes will progress and gain traction on Capitol Hill.

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