There is a robust system that delivers funding from capital markets to US households to finance their homes. To better understand how one of these pieces, wholesale liquidity, supports mortgage lending, we analyzed more than two decades of data on the Federal Home Loan Bank (FHLBank) System to measure its impact on the lending activities of member banks and credit unions across the country.
Our research found that the liquidity mechanism the FHLBank System provides enables its members to increase lending activity across a range of products, with the largest increase shown in residential mortgage lending, in line with the FHLBanks’ mission.
The FHLBank System’s evolving role in community lending
The FHLBanks were established in 1932 during the Great Depression as government-sponsored enterprises (GSEs) to provide reliable liquidity and to boost mortgage lending. Their status as GSEs and their unique structure as member-owned cooperatives allow the FHLBanks to raise funds in the capital markets at a lower cost and pass those savings on to members through collateralized loans called advances.
Although the FHLBanks’ core liquidity mission has remained constant, the US mortgage market and FHLBank membership have evolved. Initially, membership was limited to insurance companies and thrifts, but in the 1990s, Congress expanded membership to include depository institutions with at least 10 percent of total assets in residential mortgage loans. Today, FHLBank membership is open to commercial banks, credit unions, thrift institutions, insurance companies, and community development financial institutions. FHLBank advances are used today to support a full range of members’ banking activities, including home purchases, affordable housing development initiatives, small business loans, agricultural lending, and other lending needs. Regardless of how FHLBank advances are used, they must be secured by eligible mission-related collateral, such as mortgages, housing loans, and related credit.
The 2008 financial crisis ushered in additional changes to the US housing market. Congress passed laws to increase bank capital requirements to protect consumers and the economy from similar catastrophes, and our analysis finds that after 2008, the relationship between FHLBank advances and lending became even stronger.
The impact of the FHLBank System in today’s market and communities
Given the evolution of the mortgage market, we sought to understand
- whether the FHLBank System still promotes housing and community lending and
- how member institutions that benefit from the low-cost capital are using their advances.
We analyzed how lending activities among FHLBank members changed when they used the FHLBanks’ low-cost advances. Because of data constraints, we focused on commercial banks, saving institutions, and credit unions, which together represent roughly 80 percent of FHLBank members during the study period.
The research produced three key findings:
1. FHLBank advances correspond with increases in lending by member institutions
FHLBank advances correspond with increases in nearly all lending categories, with notable increases in residential, small business, and small farm lending. Each $100 increase in advances relative to assets corresponds with $38 of additional loans over assets, from 2002 to 2024. The impact increased post-2008, rising to $48 in additional lending over assets.
The relationship between advances and lending is not a one-to-one conversion, nor would such a relationship be expected, given how lenders manage their balance sheets. Banks do not lend 100 percent of any funding source, as they must maintain cash reserves, regulatory capital buffers, and liquidity for operational needs.
For credit unions, a $100 increase in advances relative to assets corresponds with a $27 increase in total lending relative to assets ($36 post-2008). A difference-in-differences analysis shows that total lending activity by credit unions also increases following their becoming an FHLBank member, again demonstrating the impact of access to FHLBank funding.
2. The FHLBank System remains an integral part of the housing finance market
Over the 22-year study period, the FHLBank System played an increasing role in housing finance. After the financial crisis, the share of depository mortgage lenders that were members of the FHLBank System increased significantly. Since 2012, nearly all depository institutions engaged in mortgage lending have been FHLBank members.
Though FHLBank advances are positively correlated with most of the lending categories, the strongest relationship between advances and lending is for residential mortgage loans. Relative to a bank’s assets and after controlling for other factors, a $100 increase in advances corresponds with a $22 increase in residential mortgage lending. The correlation between FHLBank advances and member bank lending grew stronger following the Great Recession: a $100 advance is correlated with an additional $38 in residential mortgage lending. This occurred as banks were increasing their capital levels relative to lending and as Dodd–Frank and Basel III formalized stricter requirements.
3. FHLBank advances support low- and moderate-income homebuyers and smaller banks
FHLBank members also used advances to increase their lending to homebuyers with low and moderate incomes (incomes up to 80 percent of the area median income). We estimate that a $100 increase in advances, relative to bank assets, is followed by a $7.80 increase in mortgages to borrowers with low and moderate incomes.
We also found advances have a stronger positive relationship on residential mortgage lending for smaller banks than for larger ones. For example, a $100 increase in advances relative to assets is associated with a $51 increase in mortgage lending for smaller banks, compared with $38 for all banks post-2008. This may be because smaller banks often face more liquidity constraints and have less access to alternative wholesale funding markets that are available to larger banks.
What this means for the banking system
Based on our regression estimates, FHLBank advances are associated with increased overall lending by an average of $75.6 billion each year from 2002 to 2024. About half of this ($35.2 billion annually) is in residential mortgages. FHLBank advances are also correlated with increases in the volume of lending to low- and moderate-income households.
Our analysis suggests that the FHLBank System stimulates member depository institutions’ mortgage and community lending. The relationship between advances and lending is significant and has been even stronger post-2008, after the financial crisis.
That nearly all mortgage lending depository institutions are members of the FHLBank System underscores how the system’s cooperative ownership structure remains valuable financial market infrastructure. In providing low-cost liquidity to member institutions, FHLBank advances continue to support residential lending activities in line with the system’s mission.
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