US Regulator Considers Limiting Banks’ Borrowing From Backstop Lender

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US Regulator Considers Limiting Banks’ Borrowing From Backstop Lender

Jul 17, 2023 | News | 0 comments

US officials are contemplating restrictions on the capacity of major lenders to utilize Federal Home Loan Banks as a financial safety net. This is part of a broader plan to revamp the system.

The $1.6 trillion system is currently undergoing a comprehensive assessment by an American regulator, with discussions focusing on substantial changes that would constitute the most significant restructuring in decades. Sources familiar with the matter indicate that the Federal Housing Finance Agency may refine its plans before officially announcing recommendations in the near future. It should be noted that taking measures to limit the borrowing capacity of major lenders may require intervention from Congress.

The Federal Home Loan Banks (FHLBs) have become a contentious issue following their involvement in lending billions of dollars to Silicon Valley Bank, Signature Bank, and First Republic Bank, all of which subsequently experienced collapses earlier this year. Originally established during the Great Depression to stimulate home lending, the FHLBs have evolved to serve as a financial safety net for their members, while their role in housing finance has diminished over time.

Banks borrow billions from the 11 FHLBs each year without the stigma of seeking help from the Federal Reserve. The FHLB system acts as a safety net during crises and is considered second in importance to the Fed’s discount window..

In 2022, the FHFA initiated a review of the system, which gained increased attention following a crisis that occurred in March and highlighted the system’s extensive role. FHFA Director Sandra Thompson stated to lawmakers in May that a report on the review is anticipated to be released by the end of September. The report is expected to encompass recommendations to Congress, as well as potential changes that the regulator can implement.

The people involved in the matter express uncertainty about the precise criteria for determining the scope of the changes and the specific big banks that would be subject to them. A legislation passed in 1989, in response to the Savings and Loan crisis, broadened access to the Federal Home Loan Banks (FHLBs), making them available to almost all banks and credit unions.

The individuals familiar with the situation indicate that both Thompson, the FHFA Director, and her deputy director, Joshua Stallings, are likely to request from Congress an increase in the percentage of profits that the FHLBs must allocate to their affordable housing program.