Federal Home Loan Bank System (FHLB)

Definition

The Federal Home Loan Bank System was established in 1932 by the Federal Home Loan Bank Act during the Great Depression to provide stable, low-cost funding to American financial institutions for home mortgage lending, community investment, and affordable housing projects. The system consisted of twelve regional banks that acted as a reserve system for savings and loan associations, cooperative banks, and other mortgage lenders, providing them with credit in a manner similar to the Federal Reserve Bank’s support for commercial banks.

Examples

Savings and Loan Associations (S&Ls): Financial institutions that specialized in accepting savings deposits and making mortgage loans. During the mid-20th century, S&Ls relied heavily on credit from the Federal Home Loan Bank System to finance their mortgage lending activities.
Cooperative Banks: Member-owned financial institutions that provided traditional banking services with an emphasis on serving the community. These banks benefitted from the credit reserves provided by the Federal Home Loan Bank System to support their mortgage lending.
Affordable Housing Projects: Nonprofit organizations and community developers accessed funding through local banks, which in turn used the Federal Home Loan Bank System to secure credit and promote affordable housing development.

Frequently Asked Questions

What was the primary purpose of the Federal Home Loan Bank System?

Answer: The primary purpose of the Federal Home Loan Bank System was to provide a stable source of funding to member financial institutions to promote home mortgage lending, community investment, and affordable housing.
How did the Federal Home Loan Bank System support mortgage lenders?

Answer: The system supported mortgage lenders by supplying them with credit reserves, which allowed these institutions to finance more mortgage loans and support housing developments.
What types of financial institutions were members of the Federal Home Loan Bank System?

Answer: Members included savings and loan associations, cooperative banks, and other mortgage lenders.
How many regional banks made up the Federal Home Loan Bank System?

Answer: The system comprised twelve regional banks.
What legislation established the Federal Home Loan Bank System?

Answer: The system was established by the Federal Home Loan Bank Act of 1932.

Federal Reserve Bank: The central bank of the United States, providing credit reserve support to commercial banks.
Federal Home Loan Bank Act: The 1932 act of Congress that created the Federal Home Loan Bank System.
Savings and Loan Association (S&L): Financial institutions specializing in accepting savings deposits and making mortgage loans.
Cooperative Bank: A financial institution owned and operated by its members, focused on serving their community.

Online References

Suggested Books for Further Studies

Quinn, S. (2009). “The History of the Federal Home Loan Bank System, 1932-1990.”
Opdyke, J. D. (2008). “The Federal Home Loan Bank System: Its Roots in Stimulating Homeownership.”
Gorton, G. B. (2010). “Slapped by the Invisible Hand: The Panic of 2007.”

Fundamentals of Federal Home Loan Bank System: Finance and Banking Basics Quiz

### What was the primary objective behind the creation of the Federal Home Loan Bank System? - [x] To provide credit reserves to mortgage lenders - [ ] To compete directly with the Federal Reserve - [ ] To offer commercial banking services - [ ] To serve international financial institutions > **Explanation:** The Federal Home Loan Bank System was designed to provide stable credit reserves to mortgage lenders, supporting home ownership and affordable housing. ### How many regional banks were in the Federal Home Loan Bank System? - [ ] 10 - [ ] 13 - [x] 12 - [ ] 15 > **Explanation:** The system was composed of twelve regional banks that provided localized credit support to their member institutions. ### What type of financial institutions were likely to be members of the FHLB? - [ ] Commercial banks only - [x] Savings and loan associations and cooperative banks - [ ] Insurance companies - [ ] Investment banks > **Explanation:** Members of the FHLB System primarily included savings and loan associations, cooperative banks, and other types of mortgage lenders. ### What legislation established the Federal Home Loan Bank System? - [ ] The Federal Reserve Act - [ ] The Glass-Steagall Act - [ ] The National Banking Act - [x] The Federal Home Loan Bank Act of 1932 > **Explanation:** The Federal Home Loan Bank System was established by the Federal Home Loan Bank Act of 1932, to promote home mortgage lending. ### Why was the FHLB System especially important during the Great Depression? - [ ] It was a significant factor in controlling rising inflation. - [x] It provided much-needed credit to mortgage lenders during a period of financial crisis. - [ ] It replaced the Federal Reserve System. - [ ] It primarily supported stock markets. > **Explanation:** During the Great Depression, the FHLB System provided crucial credit to mortgage lenders, fostering homeownership and stabilizing the housing sector. ### The FHLB's function is similar in concept to which of the following? - [ ] The functions of commercial banks with retail depositors - [ ] Investment banks with corporate clients - [x] The Federal Reserve Bank's role with commercial banks - [ ] Credit Unions > **Explanation:** The FHLB System's function of providing credit reserves is similar to the Federal Reserve’s role in supporting commercial banks. ### Who benefits most directly from the credit provided by FHLB? - [ ] Stock market investors - [ ] Insurance companies - [ ] Federal government agencies - [x] Mortgage lenders and community financial institutions > **Explanation:** Mortgage lenders and community financial institutions are the direct beneficiaries of the credit supplied by the FHLB System. ### In what year was the Federal Home Loan Bank System created? - [ ] 1913 - [ ] 1930 - [x] 1932 - [ ] 1945 > **Explanation:** The system was created in 1932 as a response to the financial difficulties of the Great Depression. ### The primary benefit of the FHLB system to cooperative banks was: - [ ] Increased interest rates. - [ ] Reduced competition. - [ ] Direct income tax deductions. - [x] Stable funding for mortgage loans. > **Explanation:** Cooperative banks benefitted from the FHLB system's provision of stable funding resources for their mortgage lending activities. ### Which act of Congress was responsible for the creation of the FHLB System? - [ ] The Securities Exchange Act - [x] The Federal Home Loan Bank Act - [ ] The FDIC Act - [ ] The Community Reinvestment Act > **Explanation:** The Federal Home Loan Bank Act of 1932 established the FHLB System to stabilize the home loan sector.

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