Federal Home Loan Banks
The 12 Federal Home Loan Banks are stock-chartered, government-sponsored enterprises whose original mission was to provide short-terns advances to member institutions, funded with those institutions' deposits. Membership was open to specialized housing-finance lenders, mostly savings and loan associations and mutual savings banks. With continued shrinkage of their traditional clientele and ongoing consolidation of the financial system, the FHLBs have been reinventing their role in financial markets. Their advances, which now represent an important source of funding for member institutions' mortgage portfolios, rose to $506 billion at the end of 2003:IIQ, far outstripping all their other investments and assets.
By far the largest share of FHLBs assets came from the $710 billion of consolidated obligations of the Federal Home Loan Bank System--bonds issued on behalf of the 12 FHLBs collectively. The market considers these bonds to be implicitly backed by the U.S. government; consequently, the FHLBs can raise funds at lower rates of return than AAA-rated corporations. Member institutions' deposits and short-term borrowings, along with other liabilities, provided only a miniscule share of funds. The FHLBs have added to their capital as they have grown, but asset growth has outstripped capital growth; the capital-to-asset ratio fell from 5.8% in 1996 to 4.6% at the end of 2003:IIQ.
In 1997, the Chicago FHLB initiated the Mortgage Partnership Finance Program, through which it began investing directly in mortgages in addition to supporting members' own mortgage portfolios through advances. All FHLBs currently purchase mortgages directly from member institutions. The FHLBs now hold $90 billion in mortgages, more than double what they held a year ago, and mortgage portfolios are projected to be a major source of their asset growth in the future. …