eco TV Week

United States: the increased role of Federal Home Loan Banks

12/21/2018

In the US, the preservation of liquidity ratios has hidden the greater use by banks of financing from Federal Home Loan Banks, which themselves are highly exposed to the risk of maturity transformation.

Céline CHOULET

TRANSCRIPT // United States: the increased role of Federal Home Loan Banks : December 2018

Banking regulations sometimes  fail to ensure financial stability. Like when it is thought that some debt instruments have some stabilizing power while they are deprived of it. In the United States, that's the case with new rules on liquidity.

These new rules on liquidity aim among other things to reduce banks’ exposure to liquidity risk. They favour stable or long-term financing rather than short-term financing on markets. But, in order to reach this goal, American banks turn more and more to Federal Home Loan Banks.

The Federal Home Loan Banks are private credit cooperatives to which the Federal Administration gave the mission to support the US real estate market financing. They have the same status as Fannie Mae and Freddie Mac the two main mortgage refinancing agencies. So they benefit from an effective federal guarantee.

Because of this guarantee, the regulatory authorities consider loans from the Federal Home Loan Banks to commercial banks like stable financing. But, for at least three reasons, to turn to Federal Home Loan Banks is not necessarily a guarantee of more stability. First, their access to  the effective federal guarantee is conditional on Fannie Mae and Freddie Mac remaining under conservatorship. Second, the Federal Home Loan Banks are themselves exposed to liquidity risk because they carry out a substantial maturity transformation by borrowing on the short term to lending on the medium term. Third, the liquidity regulations imposed to the Federal Home Loan Banks are not consistent with banking regulations. They say that in case of stress market conditions the Federal Home Loan Banks will not renew maturing loans. But on the commercial banks side, regulations stipulate that banks could continue to use this financing method.

The risk of a brutal interruption in loans from the Federal Home Loan Banks to American banks should not be neglected. It should be really taken into consideration by banking regulatory authorities. To know more, read the last edition of #Conjoncture# on the website of the Economic Research Department. See you next year, in January, for another segment on economy. The whole team of the Economic Research Department

To go further: United States: Will central bank reserves soon become insufficient?  

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