In March 2023, the outstanding loans by Federal Home Loan Banks to financial institutions surged to a record $1 trillion during a banking crisis. Although the pace slowed at the end of the month, the increase was “driven by continued demand by depository members for liquidity”. The data reflects lending as of March’s end, so the uptick in home loan bank financing sparked by the shaky status of First Republic Bank isn’t reflected. The FHLBs were created in the Great Depression to boost mortgage lending, and now they play a role as a lender of next-to-last resort.
The increase in loans was not as high as expected, indicating that the worst of the stressin March may have abated. However, lending from the home loan banks had steadily risen over the course of 2022, as rising interest rates forced banks to seek out cash to pay back depositors moving their funds around. The spike in FHLB lending in March was caused by the collapse of Silicon Valley Bank and Signature Bank.
The home loan banks issue debt collectively, and they issued a record $304 billion in debt the week after the two banks were closed by regulators. Although borrowing has subsided from that peak, it still remains historically elevated. Total loans to the banks and insurers, which can also access the home loan banks, rose to $1.04 trillion in the first quarter, up from $819 billion the prior quarter, according to the FHLB system. This is a record high, without adjusting for inflation. The prior record was $1 trillion, reached in the third quarter of 2008.
It is important to emphasize the role of the FHLBs in the banking system and their function as a lender of next-to-last resort. The surge in lending during the March banking crisis highlights the importance of liquidity and the need for banks to access cash quickly to pay depositors. The data also shows that despite the stress in the banking system, the worst of the crisis may have passed, and borrowing has started to subside from its peak.
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