U.S. regulators consider limiting big banks’ borrowing from FHLB
As part of a broader proposal to overhaul the financial system, U.S. officials are considering limiting the ability of big banks to use the Federal Home Loan Bank (FHLB) as their financial backstop.
The adjustments are part of a comprehensive review being discussed by U.S. regulators. If enacted, it would be the biggest overhaul of the $1.6 trillion system in decades. The Federal Housing Finance Agency (FHFA) could still tweak its plans before announcing the proposal in the coming months, according to people familiar with the matter. Reining in the lending capacity of big banks will also require action by Congress.
The federally backed FHLBs brought billions of dollars in loans to Silicon Valley Bank, Signature Bank and First Republic Bank earlier this year before they collapsed, bringing them into the spotlight. Since it was created during the Great Depression to facilitate home loans, the FHLB has evolved to back its members, but the system’s role in home financing has diminished.
U.S. banks lend hundreds of billions of dollars a year from 11 FHLBs scattered across the country without the reputation of asking the Fed for help. Supporters say the system acts as a safety net during crises and economic downturns and has been hailed as the penultimate lender of last resort, second in importance only to the Fed’s discount window.
The FHFA begins its review of the system in 2022. The effort gained more attention after the banking crisis in March highlighted its expansionary role.
FHFA Administrator Sandra Thompson told lawmakers in May that a review report is expected by the end of September. She said at the time that the report would include recommendations to Congress, as well as changes FHFA could make on its own.
“FHFA remains committed to publishing our report by the end of September, which will include recommendations on a range of topics,” Adam Russell, a representative of the regulator, said in an email.
Federal Housing Finance Agency Administrator Sandra ThompsonFederal Housing Finance Agency Administrator Sandra Thompson
Exactly how the line will be drawn and which big banks the reforms will apply to is unclear, the people said. Legislation passed in 1989 after the U.S. savings and loan crisis opened up FHLB to nearly all banks and credit unions.
Thompson and her deputy, Joshua Stallings, are also expected to ask Congress to increase the percentage of FHLB profits that go to affordable housing programs, according to people familiar with the matter.