Legal Definitions - Federal Home Loan Bank

The Federal Home Loan Bank (FHLB) refers to one of twelve specialized financial institutions established by the U.S. government in 1932. These banks serve as a reliable source of funding for their member financial institutions, primarily savings banks, commercial banks, and credit unions. They provide secured loans, often called "advances," to these members. The primary goal of the FHLB system is to ensure that local lenders have access to capital, enabling them to provide financing for housing, small businesses, small farms, and small agribusinesses within their communities. The FHLBs are overseen by the Federal Housing Finance Board.

Here are some examples illustrating the function of a Federal Home Loan Bank:

• Supporting Local Mortgage Lending
  A small community bank in a rapidly growing suburban area experiences high demand for home mortgages. To meet this demand without depleting its own reserves, the bank applies for an "advance" from its regional Federal Home Loan Bank. This additional funding allows the community bank to approve more home loans, helping local families purchase homes.

  This example illustrates how an FHLB provides liquidity to a member institution. By receiving a secured loan from the FHLB, the community bank gains the necessary funds to originate more mortgages, directly supporting housing finance in its service area, which is a core function of the FHLB system.

• Financing Small Business Expansion
  A local credit union wants to expand its lending program to offer more competitive loans to small businesses in its town, such as a new bakery or a tech startup. To ensure it has sufficient capital for these new loans, the credit union secures an advance from its Federal Home Loan Bank.

  Here, the FHLB enables the credit union to boost its capacity for small business lending. The advance provides the credit union with stable, low-cost funding, allowing it to support local economic development by financing small enterprises, aligning with the FHLB's mission to support community financial institutions.

• Assisting Agricultural Operations
  A rural bank in an agricultural region needs to provide seasonal operating loans to several local farms for planting and harvesting expenses. To manage its cash flow and ensure it can meet these critical agricultural financing needs, the bank obtains a short-term advance from its Federal Home Loan Bank.

  This example demonstrates the FHLB's role in supporting financial institutions that serve the agricultural sector. The advance from the FHLB provides the rural bank with the necessary funds to extend credit to farmers, helping to sustain small farms and agribusinesses in the community, which is a specific objective of the FHLB system.