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Working Paper
The GSE implicit subsidy and value of government ambiguity
The housing-related government-sponsored enterprises Fannie Mae and Freddie Mac (the "GSEs") have an ambiguous relationship with the federal government. Most purchasers of the GSEs' debt securities believe that this debt is implicitly backed by the U.S. government despite the lack of a legal basis for such a belief. In this paper, I estimate how much GSE shareholders gain from this ambiguous government relationship. I find that (1) the federal government's implicit subsidy of Fannie Mae and Freddie Mac has resulted in a funding advantage for the GSEs over private sector institutions, (2) ...
Working Paper
Is the Federal Home Loan Bank system good for banks? a look at evidence on membership, advances and risk
Since the early 1990s, commercial banks have turned to Federal Home Loan Bank (FHLBank) advances to plug the gap between loan and deposit growth. Is this trend worrisome? On the one hand, advances implicitly encourage risk by insulating borrowers from market discipline. On the other, advances give borrowers greater flexibility to managing interest rate and liquidity risk. And access to FHLBank funding encourages members to reshape their balance sheets in ways that could lower credit risk. Using quarterly financial and supervisory data for banks from 1992 to 2000, we assess the effect of ...
Journal Article
Commercial banks’ borrowing from the Federal Home Loan Bank
Since 1990, when commercial banks were first eligible to join the Federal Home Loan Bank System, they have become an important constituency of the FHLBs. Currently, seven out of 10 banks are members, and nearly half of all banks have advances outstanding. Given the wide range of activities that commercial banks can engage in, this Commentary asks whether FHLB lending to them is consistent with their traditional housing finance mission, with the Gramm-Leach-Bliley extension of their mission to provide liquidity support to community banks, or with both.
Journal Article
Federal Home Loan Bank mortgage purchases: Implications for mortgage markets
The Federal Home Loan Bank (FHLB) System is a government-sponsored enterprise created by Congress to support residential housing finance. Historically, the twelve regional wholesale banks that constitute the FHLB System have pursued this goal by making loans to their depository institution members secured by residential mortgage loans. In 1997, however, the Federal Home Loan Bank of Chicago began purchasing pools of conforming mortgages under its Mortgage Partnership Finance Program. Today, nine FHLBs offer this program, and the remaining three offer their own Mortgage Purchase Programs. ; ...
Journal Article
Is federal home loan bank funding a risky business for the FDIC?
Easy access to FHLB funds has helped community banks stay afloat in today's competitive markets, but could pose a risk to the FDIC's insurance fund.
Working Paper
Federal Home Loan Bank advances and commercial bank portfolio composition
The primary mission of the 12 cooperatively owned Federal Home Loan Banks (FHLBs) is to provide their members financial products and services to assist and enhance member housing finance. In this paper, we consider the role of the FHLBs' traditional product--"advances," or collateralized loans to members--in stabilizing commercial bank members' residential mortgage lending activities. ; Our theoretical model shows that using membership criteria (such as a minimum of 10 percent of the portfolio being in mortgage-related assets) or using mortgage-related assets as collateral does not ensure ...
Report
The Federal Home Loan Bank System: the lender of next-to-last resort?
The Federal Home Loan Bank (FHLB) System is a large, complex, and understudied government-sponsored liquidity facility that currently has more than $1 trillion in secured loans outstanding, mostly to commercial banks and thrifts. In this paper, we document the significant role played by the FHLB System at the onset of the ongoing financial crises and then provide evidence on the uses of these funds by the System's bank and thrift members. Next, we identify the trade-offs faced by member-borrowers when choosing between accessing the FHLB System or the Federal Reserve's Discount Window during ...
Working Paper
Federal Home Loan Bank lending to community banks: are targeted subsidies necessary?
The Gramm-Leach-Bliley Act of 1999 extended the lending authority of Federal Home Loan Banks to include advances secured by small-enterprise loans of community financial institutions. The authors examine three possible reasons for the extension of this selective credit subsidy to community banks and thrifts, including the need to subsidize community depository institutions, stabilize the Federal Home Loan Banks, and address a market failure for small enterprise loans in rural banking markets. They use two empirical models to investigate whether funding constraints affect small-business ...