Home Loan Banks gain flexibility under FHFA liquidity rule

The Federal Housing Finance Agency finalized a new rule aimed at giving the Federal Home Loan Banks more flexibility in how they manage liquidity in times of stress.

Thanks to the technical adjustment, interest-bearing deposits at banks and other short-term instruments used by the Home Loan Banks will be exempt from capital requirements. The goal of the change is to make it easier for the entities to extend credit to their members, which are primarily commercial banks, credit unions, thrifts and insurance companies.

“FHFA’s priority is to ensure that the Federal Home Loan Banks manage their balance sheets and financial transactions responsibly, remaining safe and sound while providing necessary liquidity to their members,” Director Sandra Thompson said in a written statement on Tuesday. “This regulation better enables the FHLBanks to meet their mission by providing them with greater flexibility to deploy tools to facilitate the expansion of affordable, sustainable housing.”

The changes will go into effect in 90 days.

Effectively, the rule allows certain types of demand deposits and other “authorized overnight investments” to be treated the same as overnight repurchase agreements, or repos, with the Federal Reserve. It does this by exempting them from the current framework’s more restrictive “general limit” on unsecured credit, instead subjecting them to the more accommodative “overall limit.”

The Home Loan Banks are government-sponsored enterprises created during the Great Depression to support home financing throughout the country. Over time, the banks have become a key source of general operating liquidity for their members. Banks have also tended to lean heavily on them in times of funding stress, as was the case in 2023 for several banks that failed or otherwise succumbed to major deposit outflows.

The FHFA, which oversees the 11 regional Home Loan Banks as well as the government-sponsored entities Fannie Mae and Freddie Mac, has been weighing reforms to the FHLB system for years. In 2022, it began a process that included extensive public comment gathering and various informational events around the country. Those efforts culminated in a November 2023 report called “FHLBank System at 100: Focusing on the Future.”

One of the reports suggested changes was “modernizing” the banks’ abilities to meet short-term liquidity needs.

The finalized rule is broadly consistent with a proposal put forth by the agency in October, albeit with a few adjustments made in response to public feedback, including removing a requirement for daily credit calculations and replacing it with an option for the banks to calculate their exposures either daily or monthly, as most currently do. 

Another technical change was made to clarify that unsecured credit limits are “to be maintained at all times and not only based on exposure calculated at the end of the business day.” The agency also clarified that unsecured credit limits related to operational and custodial accounts would be exempted from calculations.

The finalization of this rule could go down as one of Thompson’s final acts as head of the FHFA. She is poised to step down from her position on Jan. 19, one day before President-elect Donald Trump’s inauguration.