Federal Home Loan Banks and Financial Stability

54 Pages Posted: 23 Jun 2022 Last revised: 21 Jul 2022

See all articles by Stefan Gissler

Stefan Gissler

Board of Governors of the Federal Reserve System

Borghan Narajabad

Board of Governors of the Federal Reserve System

Daniel K. Tarullo

Harvard Law School

Date Written: June 13, 2022

Abstract

The Federal Home Loan Banks are the less well-known siblings of Fannie Mae and Freddie Mac. Since these government-sponsored enterprises were created in 1932, changes in housing finance markets have rendered largely irrelevant their original purpose of increasing the availability of mortgages. Yet the level and scope of their activities have increased dramatically in recent decades. These activities have at times both exacerbated risks to financial stability and obstructed the missions of federal financial regulators. Behind these undesirable outcomes lies the public/private hybrid nature of the FHLBs. The private ownership and control of the FHLBs provide the incentive to take advantage of the considerable public privileges from which they benefit – including an explicit line of credit from the United States Government and an implied guarantee of all their debt similar to that enjoyed before the Global Financial Crisis by Fannie Mae and Freddie Mac. This paper examines the past incidence and future potential for the FHLBs to amplify financial stability risks. It offers a framework for regulatory reform by the Federal Housing Finance Agency to contain these risks and avoid harmful interference with the activities of other federal regulators.

Suggested Citation

Gissler, Stefan and Narajabad, Borghan and Tarullo, Daniel K., Federal Home Loan Banks and Financial Stability (June 13, 2022). Harvard Public Law Working Paper No. 22-20, Available at SSRN: https://ssrn.com/abstract=4135685 or http://dx.doi.org/10.2139/ssrn.4135685

Stefan Gissler

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Borghan Narajabad

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Daniel K. Tarullo (Contact Author)

Harvard Law School ( email )

Harvard Law School
Areeda 335
Cambridge, MA 02138
United States
617-998-1702 (Phone)

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