NCPA - National Center for Policy Analysis

Federal Home Loan Banks Subsidize Commercial Banks

August 17, 1998

The Federal Home Loan Bank System was created during the Great Depression to funnel scarce funds to mortgage markets. Today, with financial markets awash with liquidity, it has "become a government-subsidized source of funds for practically any depository institution," in the words of Treasury Secretary Robert E. Rubin.

Reformers say it is an institution which has outlived its purpose -- and a rich and powerful one at that.

  • With assets of $358 billion as of the end of 1997, the Federal Home Loan Bank was the third largest U.S. financial institution, behind Fannie Mae and Chase Manhattan -- but exceeding Citicorp's $311 billion.
  • Its loan book has been growing 25 percent a year -- soaring to $228 billion, double its 1993 level.

The 12 regional Home Loan Banks raise money in capital markets, then loan to thrifts and banks -- as well as parking much of it in higher-yielding investments. Although the loans are supposed to fund home mortgage lending, Secretary Rubin says that "Because money is fungible, there is currently no assurance that money lent by the System will actually be used to finance housing...."

The Home Loan Banks' borrowing costs are held down by the implicit federal connection and the exemption of its bonds from state income taxes.

For banks, it's a good subsidized deal. They can raise funds without increasing interest paid on deposits, running ads or even maintaining branches. System loans can also be cheaper than other wholesale funds because borrowers earn dividends on the stock they must buy to join the system.

But changes are being discussed. Congress is considering opening the system to all banks with less than $500 million in assets, and a pilot program at the Chicago Home Loan Bank is directly funding mortgages. However, supporters of more fundamental reforms question why banks -- which are making record profits -- need more federal subsidies. What need is there any longer, they ask, for the whole Federal Home Loan Bank System?

Source: Gary Silverman, "Uncle Sam Is Giving Banks a Free Ride," Business Week, August 17, 1998.


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