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Federal Home Loan Bank System (FHLB)

Written By
Paul Tracy
Updated January 16, 2021

What is the Federal Home Loan Bank System (FHLB)?

Created by Congress in 1932, the Federal Home Loan Bank System (FHLB) is a lending system for financial institutions.

How Does the Federal Home Loan Bank System (FHLB) Work?

FHL banks offer loans to their members, which are other banks, credit unions, community development financial institutions and insurance companies. The members have to provide collateral for their loans, and that collateral is typically mortgage loans and other assets. Each FHLB is required to develop a community lending plan that explains how the bank will address the needs of the community it serves.

There are a dozen FHLBs. They are headquartered in Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, Seattle, and Topeka.

Through its Affordable Housing Program, FHL banks grant money to local banks involved in the purchase, construction or rehabilitation of affordable housing. Banks then partner with local developers and community organizations to build or renovate housing. The program provides a source of funding for the construction of affordable housing in the United States.

The Community Investment Program offers below-market-rate loans to members for long-term financing for housing and economic development aimed at low- and moderate-income families and neighborhoods. Those projects may include roads, retail development, and other infrastructure, in addition to business loans.

FHL banks also offer programs such as the New Market Tax Credit Initiative, Economic Development Grants, Urban Development Advances, Rural Development Advances, and Letters of Credit.

To join an FHL bank, financial institutions typically buy stock in the bank. Each FHL bank has its own board of directors and is regionally focused. The Federal Housing Finance Agency regulates FHL banks.

Why Does the Federal Home Loan Bank System (FHLB) Matter?

The FHLB system encourages economic revitalization through infrastructure and housing construction. All loans the FHLB makes are fully collateralized. FHL banks often sell debt securities collateralized by those loans. Because FHL banks are cooperatives, they do not necessarily aim for high returns, which theoretically leads to lower borrowing costs. FHLB are jointly and severally liable for these obligations, which means that if any one bank begins to fail, then the other member banks are required to step in and cover the failing bank's obligations.

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