Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Atlanta
Economic Review
The Federal Home Loan Bank system : the "other" housing GSE.
Mark J. Flannery
W. Scott Frame

Founded in 1932, the twelve Federal Home Loan Banks (FHLBs) have historically provided long-term funding to specialized mortgage lenders. But legislative changes in the wake of the 1980s’ thrift crises spurred the FHLBs to expand in both size and scope. For example, FHLB balance sheets now also include a substantial investment in mortgages and mortgage-backed securities, and the attendant interest rate risk has created financial and accounting difficulties at some of the FHLBs. ; Like Fannie Mae and Freddie Mac, the FHLB System is a government-sponsored enterprise that funds itself largely with federal agency debt obligations that investors perceive to be implicitly guaranteed by the U.S. government. This article identifies some differences in risk-taking incentives between the cooperatively owned FHLB System and investor-owned Fannie Mae and Freddie Mac. ; Cooperative ownership itself does not reduce FHLB risk-taking incentives because, unlike many mutuals, the FHLB System does not bundle its equity and debt claims. Also, the joint-and-several liability provision in the FHLBs’ consolidated debt obligations and a lack of equity market discipline may heighten FHLB risk-taking incentives. However, the FHLBs cannot avail themselves of equity-based managerial compensation, which create high-powered risk-taking incentives in investor-owned firms. Thus, it is unclear whether the FHLBs’ risk-taking incentives are necessarily weaker than Fannie Mae’s and Freddie Mac’s.

Download Full text
Cite this item
Mark J. Flannery & W. Scott Frame, "The Federal Home Loan Bank system : the "other" housing GSE." , Federal Reserve Bank of Atlanta, Economic Review, issue Q 3, pages 33-54, 2006.
More from this series
JEL Classification:
Subject headings:
Keywords: Federal home loan banks
For corrections, contact Meredith Rector ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal