Community banks are the economic engine that drives growth in communities across the United States. They help entrepreneurs start small businesses, support large businesses as they expand, enable builders to construct homes, and empower everyday people to realize their dreams by financing a car, a home purchase, or a renovation.
The Federal Home Loan Banks (FHLBs) have been an integral part of helping community banks serve the needs of Main Street for over 90 years. Now, new research is helping to illustrate how these institutions work together to help U.S. communities grow and prosper.
How community banks partner with the FHLBs
The FHLBs are a cooperative network of wholesale lending institutions that provide additional funding to community banks, enabling them to support projects that would otherwise be out of reach due to lending limits or the size of their deposit base. Community bankers and the broader financial sector have long known the benefits the FHLBs provide to the economy—larger community development projects would be almost impossible to do without the help of the FHLBs.
The FHLBs are also key players in supporting affordable housing in their districts by working with community banks and local housing authorities and leaders to develop safe affordable housing solutions where they are needed. And as government-sponsored wholesale banks that are owned by their members, the FHLBs do so without receiving any taxpayer money or other federal funding
Of course, community banks also rely on the FHLBs as a stable, safe source of liquidity for balance sheet management—helping them meet the needs of their customers in all economic conditions.
With each FHLB prudentially regulated by the Federal Housing Finance Agency and governed by a board of directors from its regional district—which keeps the system rooted in local markets—the system works and works very well.
New research spotlights FHLB impact on community-based lending
Now, new research from the Urban Institute is confirming the benefits to local communities and the national economy provided by the FHLBs. Most recently, the Urban Institute a Washington-based think tank reported that FHLB advances are strongly associated with higher lending across local financial institutions, expanding total lending by up to $97.3 billion per year. These advances support small business, small farm, and community development lending, but the lending response is strongest in residential real estate—supporting mortgage activity, including for lower-income borrowers, at a time when many face housing affordability challenges.
Further, a previous Urban Institute report found that FHLB advances not only supply housing liquidity but also substantially enhance overall financial stability. That study estimates that the FHLBs generate up to $21.4 billion in annual economic value by reducing the risk of systemic crises, with the system’s advances supporting industry liquidity during periods of stress.
These studies are clear: the funding provided by the FHLBs to Main Street lenders makes a difference—a big difference—in local communities. This has been true for over 90 years, and community banks’ relationship with the FHLBs is stronger than ever.
With policymakers reexamining housing-finance policy and exploring ways to improve U.S. housing affordability, building on the years-long success of the FHLBs is fundamental—rather than attempting to fix something that’s not broken—should be a top priority.
Ron Haynie is ICBA senior vice president of mortgage finance policy.