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The Federal Home Loan Bank system may need an update after 90 years


We've seen some high-profile bank failures this year. All of them, including First Republic, borrowed money from Federal Home Loan Banks before their demise. Darian Woods and Wailin Wong from our daily economics podcast, The Indicator, explain how this 90-year-old piece of financial architecture works and why it might need an update.

DARIAN WOODS, BYLINE: If you're not working in the banking or housing industries, you might not ever have heard of the Federal Home Loan Bank System.

WAILIN WONG, BYLINE: They provide funding to other banks in the form of loans. That money goes towards helping banks that might be struggling with declining deposits or liquidity issues.

WOODS: And the Federal Home Loan Bank System has been playing this role since 1932.

WONG: At first, membership in the system was limited to financial institutions that provided mortgages. But in 1989, the system was opened up to commercial banks and credit unions. Aaron Klein is a senior fellow in economic studies at the Brookings Institution.

AARON KLEIN: The home loan bank system has one of the great business models of society.

WONG: So here's what the Federal Home Loan Banks do. They raise money by selling bonds, then they lend money to their members, often at lower rates than what their member banks can get elsewhere.

WOODS: Now, a bank that wants one of these loans has to provide collateral, and a common form of collateral is a mortgage.

WONG: Let's say a bank that's taken out one of these loans gets into trouble and fails.

KLEIN: The home loan bank gets to go in first through a legal mechanism called a super lien and be made whole.

WOODS: Federal Home Loan Banks get to jump at the front of the queue to get paid back.

WONG: But Aaron says this super lien has created a bit of a problem. It's made the Federal Home Loan Banks more willing to lend money to banks that could be considered risky borrowers.

WOODS: And this dynamic became important in the 2008 financial crisis, with financial institutions like Washington Mutual and Countrywide Financial.

KLEIN: They had these kind of crummy subprime mortgages on their books, and the market started to get a little skeptical of them in 2007. Hey, wait, the Home Loan Banks will take them.

WONG: In other words, the Federal Home Loan Banks will accept these crummy subprime mortgages as collateral because even if the financial institutions fail, the super lien means that the Federal Home Loan Banks will still get paid before everyone else. Ryan Donovan, the head of the trade association for Federal Home Loan Banks, he's described the banks as shock absorbers in times of crisis.


RYAN DONOVAN: ...That they're providing critical access to liquidity for community banks, credit unions.

WONG: He was speaking at an event last year to discuss the future of the system.


DONOVAN: They were the unsung heroes of the global financial crisis.

WOODS: But Aaron Klein at Brookings thinks that the Federal Home Loan Banks actually made the subprime crisis worse by lending so much money to financial institutions that were already doomed.

WONG: Fast forward to this year's turbulence in the financial system, and some of the same red flags have reappeared. Silicon Valley Bank, which failed in March, had $15 billion in outstanding loans from the Federal Home Loan Bank of San Francisco at the end of 2022.

WOODS: The other major banks that have collapsed this year also borrowed billions of dollars from the Federal Home Loan Bank.

WONG: Aaron believes the Federal Home Loan Banks do a lot of good but need reform. And he's not alone in scrutinizing the system. The government agency that regulates these banks recently wrapped up a monthslong listening tour as part of a comprehensive review of the entire system.

WOODS: Darian Woods.

WONG: Wailin Wong, NPR News. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Wailin Wong
Wailin Wong is a long-time business and economics journalist who's reported from a Chilean mountaintop, an embalming fluid factory and lots of places in between. She is a host of The Indicator from Planet Money. Previously, she launched and co-hosted two branded podcasts for a software company and covered tech and startups for the Chicago Tribune. Wailin started her career as a correspondent for Dow Jones Newswires in Buenos Aires. In her spare time, she plays violin in one of the oldest community orchestras in the U.S.
Darian Woods is a reporter and producer for The Indicator from Planet Money. He blends economics, journalism, and an ear for audio to tell stories that explain the global economy. He's reported on the time the world got together and solved a climate crisis, vaccine intellectual property explained through cake baking, and how Kit Kat bars reveal hidden economic forces.