The Federal Home Loan Bank Act supplies credit to the home mortgage market.
In the depths of the Great Depression, the United States banking system faced particularly tough challenges in remaining solvent. To help address some of the era's challenges, Congress approved the Federal Home Loan Bank Act in 1932. Understanding the purpose and some of the provisions of of the Federal Home Loan Bank Act is important for some people working in and studying the American banking system.
Historical Context
The Federal Home Loan Bank Act was passed in 1932, at the height of the Great Depression. The FHLBA was one of a number of banking system reforms passed in the 1930s that were intended to improve the solvency and reliability of the nation's lenders. According to ENotes, the FHLBA was ultimately not a success and required further legislation to strengthen the banking sector under Roosevelt. The legislation nonetheless laid the foundation for federal intervention in the banking system, and its basic structures remain in effect at the time of publication.
Basics
The Federal Home Loan Bank Act was designed to stabilize and provide credit to the residential mortgage market. The legislation set up a system of 12 regionally located and federally backed banking institutions called the Federal Home Loan Banks. Under the FHLBA, these institutions secure loans to private banks that provide home loans to their customers. In the 1980s, the eligibility of banks to participate in the Federal Home Loan Bank system was expanded to include regular commercial banks and credit unions in addition to savings and loans. At the time of publication, 8,075 commercial banking institutions are members of the Federal Home Loan Bank system.
Independence of the FHLB System
Despite the fact the Federal Home Loan Bank system is a government-sponsored enterprise, its capital expenditures are private capital, and the system does not rely on public tax dollars for support. To finance its operations, the Federal Home Loan Banks sell bonds to public investors and raise capital from participating banks through stock sales, much like a normal commercial bank. Each regional FHLB is independently managed, though some of the system's directors are appointed by the Federal Housing Finance Agency.
Lender of Last Resort
Under the provisions of the Federal Home Loan Bank Act, the FHLB system is considered a lender of last resort. This means that in the event of a credit crisis, much like the subprime mortgage crisis of 2007, it is the responsibility of the FHLB system to help stabilize the market by providing credit to member institutions if private sources of capital are not available. In a tough market, where access to credit becomes limited for commercial banks, the FHLB system will be required to offer more loans to its members than usual. Under normal market conditions, the FHLB system is less involved in the credit market, and commercial banks rely more on depositors or investment banks for capital.
