Commercial Banks' Borrowing from the Federal Home Loan Banks of Gramm-Leach-Bliley - Evidence on Lending Consistency with Housing Finance Mission

Sep 21, 2026

Uploaded by Aurelia

James B. Thomson explains how the 1989 Financial Institutions Reform, Recovery, and Enforcement Act reshaped federal financial system policy and expanded the Federal Home Loan Banks (FHLBs) beyond housing-specialist institutions. The text describes FHLBs as liquidity providers that make advances against member mortgage portfolios, and it traces how the 1999 Gramm-Leach-Bliley Act extended these advances to support small business and agricultural lending. Using bank-level patterns through July 2002, the commentary investigates whether commercial banks’ reliance on FHLB funding aligns with the FHLBs’ traditional housing mission and its community-bank liquidity role.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages5

Reading Time13 min

AccessFree to download

Background and policy changes

The 1989 reform and FHLB mission expansion

The 1999 Gramm-Leach-Bliley extension

Role of FHLBs in funding markets

Liquidity support via mortgage advances

Growth of commercial bank membership

Research question and approach

Evidence on borrowing patterns

Consistency with housing finance mission

by James B.Thomson nactment of the Financial Institu-tions Reform,Recovery,and Enforce-ment Act of 1989 was a watershed eventin the financial system policy of the fed-eral government.It represented the firstconcrete effort to resolve the 1980s thriftdebacle and to make meaningful finan-cial system and regulatory reforms.Italso changed the role of the FederalHome Loan Banks by opening them upto commercial banks. The Federal Home Loan Banks(FHLBs)function as special lendingfacilities for the housing finance indus-try.These government-sponsored enter-prises increase the liquidity of mortgagemarkets by making advances(loans)against member institutions'mortgageportfolios.For the better part of sixdecades,membership in the FHLBswas limited to institutions specializingin housing finance—largely savingsassociations.This limitation establisheda strong connection between FHLBlending and housing finance.The widerrange of assets commercial banks canhold and the fungibility (interchange-ability)of advances weakens the con-nection between housing finance andFHLB lending to banks.So,while itreaffirmed the FHLBs'housing financemission,the Financial InstitutionsReform,Recovery,and Enforcement Actwidened the scope of lending that wassupported,albeit indirectly,by FHLBadvances.A decade later,the Gramm-Leach-Bliley Act of 1999 contained aprovision that formally extended FHLBadvances to support the smallbusinessand small agricultural loan portfoliosof community financia institutions(then defined as those with assets ofS500 million or less).In this provision Commercial Banks'Borrowing from theFederal Home Loan Banks of Gramm-Leach-Bliley,Congressamended the FHLBs'mission to includeproviding broader liquidity support forcommunity banks and thrifts. Today,commercial banks are an impor-tant constituency of the FHLBs.Startingfrom zero at the beginning of 1990,com-mercial bank membership had grown to 5,786(73 percent of all FHLB members)by December 31,2001.Moreover,at theend of 2001,three-fourths of all FHLBadvances went to commercial banks,which collectively borrowed S198 billion(nearly 42 percent of the total dollar vol-ume of FHLB advances). Commercial banks'prominence asmembers of the FHLB system and theirincreased use ofFHLB advances forfunding is not surprising.After all,throughout the 1990s the attractivereturns offered by the stock marketand competition from other financialinstitutions made it difficult for banks toattract and retain deposits.Moreover,thestability of FHLB advances asa fundingsource and the below-market lending ratemake borrowing from them attractive. Given the cost and funding advantagesthat FHLBs enjoy as government-sponsored enterprises(see the Congres-sional Budget Office studies in therecommended reading list)and theincreasing share of FHLB assets repre-sented by advances to banks,I aminterested in the effects on the financialsystem of changes in access to FHLBfunding.Is the borrowing pattern consis-tent with the FHLBs'traditional housingfinance mission?With the FHLBs'providing liquidity support for commu-nity banks?With some other objective?I shed light on these questions by July 2002 Since 1990,when commercial bankswere first eligible to join the FederalHome Loan Bank System,they havebecome an important constituency ofthe FHLBs.Currently,seven out of10banks are members,and nearly halfofall banks have advancesoutstanding.Given the wide range of activities thatcommercial banks can engage in,thisCommentary asks whether FHLBlending to them is consistent withtheir traditional housing financemission,with the Gramm-Leach-Bliley extension of their mission toprovide liquidity support to commu-nity banks,or with both. examining the characteristics of banks'borrowing from FHLBs,includingthe distribution of borrowing acrossdifferent sizes of banks.I find evidenceof a positive relationship between abank's reliance on FHLB advances forfunding and the share of assets investedin housing-related credits.Althoughcommun

FAQs

What policy changes expanded the FHLB system’s lending role?

The 1989 Financial Institutions Reform, Recovery, and Enforcement Act opened FHLBs to commercial banks, and the 1999 Gramm-Leach-Bliley Act formally extended FHLB advances to support small business and small agricultural loan portfolios.

How do FHLBs provide liquidity to member institutions?

FHLBs increase liquidity in mortgage markets by making advances (loans) against member institutions’ mortgage portfolios, with the collateral option helping reduce funding costs.

What does the commentary examine about commercial banks borrowing from FHLBs?

It studies whether borrowing patterns are consistent with the FHLBs’ traditional housing-finance mission and the extended mission to provide liquidity support, using characteristics of banks’ borrowing and related housing-related asset shares.

Sep 21, 2026

Uploaded by Aurelia