The Federal Home Loan Bank System and Resolution of a Failure

N. Eric Weiss
Specialist in Financial Economics

Todd Garvey
Legislative Attorney

The Federal Home Loan Bank system is a cooperative, government-sponsored enterprise, created to provide liquidity to the nation's lenders with a special focus on low and moderate-income housing and community development, all under the supervision of the recently created Federal Housing Finance Agency. Each Federal Home Loan Bank (FHLBank) essentially acts as a lender to lenders. The 12 regional banks engage in no direct lending to the public. Instead, member banks turn to the FHLBank for on-demand low interest loans, which the member bank can then use to issue mortgages or other loans to the general public. The 12 regional banks that make up the FHLBank system, though unfamiliar to many, have been key players throughout the financial 

The FHLBanks played an active role in efforts to stabilize the financial system throughout the financial crisis. As other sources of funding fell, financial institutions increasingly turned to the FHLBanks as a source for capital. FHLBank advances (loans to member banks) likely prevented a number of financial institutions from collapsing, and delayed the failure of other institutions long enough to allow a merger or acquisition by a third party. The FHLBanks are currently, however, suffering various degrees of financial difficulty due to declining home prices, rising delinquencies and foreclosures, and previous decisions that turned out badly. 

The FHLBanks' recent financial troubles have led to questions as to what legal options would be available to handle the failure of one, or all, of the FHLBanks. Both the structure of the FHLBank system itself and federal law provide for certain procedures to stave off any system wide collapse. Were an FHLBank to fail, the existing internal cooperative structure of the FHLBank system may be able to stabilize the system as a whole. If internal corrections fail, however, statutory authority exists for a government intervention targeted at either stabilizing or liquidating the affected bank. 

This report provides an overview of the FHLBanks, analyzes the current financial condition of the FHLBanks, and examines the legal issues that would be germane if one of the 12 regional FHLBanks were to become insolvent. .


Date of Report: March 3, 2010
Number of Pages: 15
Order Number: R41102
Price: $29.95

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