Banks Leaned on a Little-Known Lender in March as Customers Fled

Corp. , a brokerage firm whose bank operations experienced significant withdrawals, on Monday disclosed that it had $46 billion in FHLB advances in the first quarter, up from $12 billion in the prior quarter and zero a year earlier. Other banks are also expected to disclose their advances in the coming weeks. 

The 11 government-sponsored home-loan banks have drawn scrutiny in recent weeks because Silicon Valley Bank, Signature Bank and Silvergate Capital Corp. borrowed billions from them. Those banks all went out of business in March in a stunning series of collapses. Critics say that the home-loan banks have gone beyond their mission of supporting housing and that the closures show they sometimes prop up banks that aren’t stable.

FHLB officials say the system helps banks finance mortgage loans and support communities, and they say that lending becomes more important in times of financial crisis.

“The FHLBanks were a calming force during the recent market stress by providing vital liquidity that helped stabilize the U.S. economy,” Teresa Bryce Bazemore, president and chief executive of the San Francisco FHLB, which lent to SVB and Silvergate, said.

Ryan Donovan, president and chief executive of the Council of Federal Home Loan Banks, a trade group that represents the banks, said regulators historically have supported FHLBs lending to struggling banks as a way to help manage any failures. He said the home-loan banks “take into consideration both a member’s creditworthiness and the quality and value of the assets pledged as collateral to ensure prudent lending to members.”

The home-loan banks are owned by their member institutions, which get dividends. Banks leave collateral, such as mortgages, with FHLBs in exchange for credit lines. 

Although they are separate entities, the banks are jointly liable for each other’s debt offerings. That means if one bank were to fail, the others would be responsible for paying bondholders. The banks have never booked a credit loss in their 90-year history.

The banks, which are regulated by the Federal Housing Finance Agency, can borrow and lend at relatively low rates. 

Still, the money is more expensive for banks than consumer deposits. The current rates on FHLB advances are generally between 4% and 5%. The typical savings account pays 0.37%, according to the Federal Deposit Insurance Corp.

Schwab said that the higher-cost funding from the FHLB would hit revenue and profits. “These are limited, and they’re temporary,” Chief Financial Officer Peter Crawford said of the brokerage’s advances. “This is not something that is going to be part of our long-term financial picture, and we will certainly pay them off as quickly as we can.”

FHLB advances to banks reached a post-financial crisis record of about $820 billion at the end of 2022, according to Federal Reserve and FHLB data. SVB, Silvergate and First Republic Bank —which got a $30 billion deposit infusion from the biggest U.S. banks last month as it faced fleeing customers—were among the top borrowers at the San Francisco FHLB at the end of 2022.  

Cornelius Hurley, a Boston University law professor and a former director of the Federal Home Loan Bank of Boston, said the fact that SVB, Signature and Silvergate ramped up borrowing from FHLBs last year should have been a sign they were in trouble.

“Those are banks that they lent liberally to when perhaps they should not have,” he said.

Other banks say they borrow in the course of doing business.  

“Not having the Federal Home Loan Banks would make the whole economy and the banking industry less efficient and more cumbersome,” said Mr. Rigler.

The home-loan banks have assumed an important role over the past two decades. Loan volumes surged in 2007, in the run-up to the financial crisis. Countrywide and IndyMac borrowed from the home-loan bank system before collapsing as the crisis unfolded.

Banks again started borrowing more from the FHLBs last year, when the Fed started raising interest rates. The central bank’s rate increases prompted some depositors to move their money into money-market funds and Treasurys for better returns. The money from the FHLBs helped banks plug the holes left by the departing depositors. 

“The home-loan banks can simultaneously provide support to the system in times of crises while allowing badly managed banks to go too far out over their skis,” said Aaron Klein, a senior fellow at the Brookings Institution.

When customers at SVB and Signature pulled their deposits in a panic in March, the banks desperately tried to tap the FHLBs for more money before failing but they ran out of time. SVB also asked the San Francisco FHLB to move billions of dollars worth of collateral to the Fed’s discount window for emergency funding but hit additional timing roadblocks, The Wall Street Journal previously reported.

The week after SVB and Signature failed, the FHLB system issued $304 billion of debt, suggesting a run-up in demand for advances.

Last year, the FHFA kicked off a review of the home-loan banks, in part to see whether they should devote more resources to housing programs. The banks by law must devote 10% of their earnings to affordable-housing programs. The agency plans to release recommendations before the end of the year.

Sen. Catherine Cortez Masto (D., Nev.) in the last Congress sponsored legislation that would double their investment in affordable-housing programs to 20% of earnings. 

“That’s their original mission, and they’ve got to stay true to it,” she said in an interview. 

Write to Rachel Louise Ensign at [email protected], David Harrison at [email protected] and Hannah Miao at [email protected]