If you want to understand how community banking works in the U.S., it is important to know something about the Federal Home Loan Bank system. The FHLBs have gotten more publicity than usual this year because of the roles two of them played in providing short-term financing to four troubled banks.
But the FHLBs — there are 11 of them — do much more than provide emergency financing. As wholesale banks that are cooperatively owned by their members, which are mainly community banks, the FHLBs provide a high level of service to their members, in close cooperation with their communities, to support mortgage lending and affordable housing.The wholesale banks work as “service-driven organizations,” according to José R.
The FHLBs aren’t funded with taxpayer money. Rather, they are owned by their members, which include banks, credit unions and insurance companies, along with some Community Development Financial Institutions. Members own capital stock in the banks, upon which their voting rights are based. After the bank failures — or planned closure, in the case of Silvergate — that came after large numbers of depositors moved their money from the regional banks to bigger banks, some commentators implied that it might have been a mistake for the FHLBs to lend to the flailing institutions. Those opinions overlook some important facts:
Collateral relationships One thing that sets the FHLBs apart from other wholesale lenders to banks is their collateral relationship with their members. Accepting mortgage loans as collateral, rather than only accepting securities, is a “fundamental essence of the system,” he said. The macro case for FHLBs González referred to the FHLB system as “a utility” that plays “an important role in the financial stability of the U.S. banking industry.” By supporting a group of about 6,800 financial institutions, the system makes it easier for the smaller banks to survive. And that diversity of lenders means stronger local knowledge of economic conditions.
During the first quarter, FHLB advances to members increased 27% to a record $1.04 trillion, according to Freddie Strickland, vice president of equity research at Janney Montgomery Scott. “That relationship doesn’t end with the members. It extends to regulators,” said Goldstein, who chairs the FHLB system’s Regulatory Outreach Committee, which fosters engagement with the member institutions’ regulators at all levels.Municipal deposits are an important source of funding for community banks.
“We did that with our Small Business Recovery Grant Program, making grants of $10,000 directly through our members to small businesses and nonprofits to help them keep the lights on,” he said. The FHLB of San Francisco provided a $1 million grant to help fund the Century Housing Corp. — a Community Development Financial Institution that is a member of the bank — build a 53-unit apartment building as part of the renewal of the Potrero Hill neighborhood.