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Federal Loan System

In: Business and Management

Submitted By jinzz
Words 3665
Pages 15
Term Paper on:
The Federal Home Loan Bank System

Abstract

The Federal Home Loan Bank (FHLB) System is a large, complex, and understudied government-sponsored liquidity facility that currently has more than $1 trillion in secured loans outstanding, mostly to commercial banks and thrifts. In this paper, we document the significant role played by the FHLB System at the onset of the ongoing financial crises and then provide evidence on the uses of these funds by the System’s bank and thrift members. Next, we identify the trade-offs faced by member-borrowers when choosing between accessing the FHLB System or the Federal Reserve’s Discount Window during the crisis period. We conclude by describing the fragmented U.S. lender-of-last-resort framework and finding that additional clarity about the respective roles of the various liquidity facilities would be helpful.

Key words: Federal Home Loan Bank, government-sponsored enterprise, lender of last resort, liquidity

Table of Contents

Introduction

The Federal Home Loan Bank System

The Role of FHLB Advances during the 2007 Liquidity Crisis

Aggregate Balance Sheets

Regression Analysis

Crisis-Related Lending by the Federal Reserve and the FHLB System

Conclusion

References

Introduction

In July 2007, the credit rating agencies (Standard & Poors, Moody’s, and Fitch) responded to the

rapid deterioration in the performance of recently originated subprime mortgages by taking a

historical downgrade action on the entire sector of associated mortgage-backed securities (MBS).

This downgrade had global implications.

Many of the very largest U.S. and European financial institutions were directly exposed

to the subprime mortgage market through loans to subprime originators, investments in the

senior tranches of subprime MBS, and retained tranches of...

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