GAO Releases Report on the Importance of Federal Home Loan Banks

On Dec. 17, the Government Accountability Office (GAO) released a report titled “Federal Home Loan Banks: Role During Financial Stress and Members’ Borrowing Trends and Outcomes.” The report examines (1) banks’ Federal Home Loan Bank (FHLBank) borrowing trends from 2015 through June 2025; (2) associations between FHLBank borrowing and outcomes; (3) policy considerations for potential changes to FHLBank lending; and (4) communication between FHLBanks and relevant federal agencies, especially during periods of financial stress. The report finds that FHLBanks are a reliable and consistent source of funding for banks of all sizes and they play an essential role in the health of the U.S. banking system.

FHLBanks Mission and Membership

The Federal Home Loan Banks (FHLBanks) were created to provide a reliable, low-cost source of liquidity to local lenders so they could continue making home loans, even during periods of market stress. The FHLBank system is a cooperative of 11 regional banks (based in Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco and Topeka), each owned by its member institutions. Financial institutions eligible for membership include: 1) federally insured depository institutions; 2) insurance companies; 3) community development financial institutions; and 4) certain non-federally insured credit unions.

As of June 2025, of the 4,424 banks operating in the United States, 93% of them are FHLBanks members. Except for community financial institutions, members must be insured depository institutions that purchase or originate mortgages with terms of five years or more (including MBSs) and have at least 10% of their total assets in mortgages or related assets. FHLBanks members are also required to purchase and maintain stock in their FHLBank.

Borrowing Trends

The first section of the report examines borrowing trends for members over the last 10 years. The report finds that between the first quarter (Q1) of 2015 and the second quarter (Q2) of 2025, over 75% of FHLBanks members borrowed from their FHLBank at least once during that period. On average, two thirds of the members who borrowed from the FHLBanks had outstanding borrowing in each quarter. From Q1 2015 to the fourth quarter (Q4) of 2019 outstanding FHLBank borrowing remained relatively stable with an average fluctuation in total borrowing of 5% between quarters. At the onset of the COVID-19 pandemic in Q1 2020, member borrowing increased by 27% from the previous quarter to a total of $613 billion. Member banks used these draws to build up cash reserves and secure increased liquidity as the pandemic worsened. Between the start of the COVID-19 pandemic and the 2023 banking failures that occurred in Q1 2023, FHLBank borrowing saw a U-shaped trajectory. Between Q2 2020 and Q4 2021 FHLBank borrowing decreased by an average of 15% each quarter; then, beginning in Q1 2022 borrowing increased on average by 34% for each quarter of that year. When the 2023 bank failures began in the first quarter, FHLBank borrowing jumped by 37% between quarters, raising the total outstanding borrowing by member banks to its highest level ever at $804 billion. Nearly a third of this borrowing came from mid-sized and regional banks (banks with assets between $10 billion and $100 billion) that were under increased pressure at this time and relied on FHLBanks to provide much-needed liquidity. Since the 2023 bank failures, FHLBank lending has steadily returned to normal levels with total borrowing similar to pre-pandemic levels of between $450 and $550 billion as of Q2 2025.

The report highlights that large banks (banks with over $10 billion in assets) have accounted for a majority of the total borrowing from FHLBanks over the past 10 years. While large banks only account for 3% of total members, these large banks hold, on average, nearly three quarters of all outstanding borrowing. Furthermore, during times of increased stress on the banking system, like in 2020 and in 2023, large banks increased their borrowing from the FHLBanks with them accounting for an average of 84% of outstanding borrowing during these time periods. For over 75% of FHLBank members, lending from the FHLBanks is typically only 5% of total assets, and an overwhelming majority of these borrowers do not significantly change this ratio between quarters. Bank executives interviewed for the report pointed to various reasons as to why FHLBank borrowing is a preferred funding source for their banks. This includes: the speed and availability of FHLBank funds, the flexible maturity options, the cost advantages and the lack of stigma.

Positive Outcomes

GAO found that higher borrowing from the FHLBanks was associated with more lending for small banks (banks with less than $10 billion in assets). Specifically, the report found that a 1% increase in total FHLBank borrowing each quarter was associated with a 0.009% increase in total lending for small banks over the same period. Additionally, 1% increases in FHLBank borrowing led to even higher increases in lending for real estate, with a 0.011% increase in residential lending and a 0.01% increase in commercial lending. According to the report, these findings suggest that “FHLBank borrowing [by small banks] may support more loans for housing and community development activities.”

Higher borrowing from member banks was also found to not be associated with any increased safety and soundness concerns. The report found that banks with higher FHLBank borrowing, or higher increases in borrowing, were less likely to appear on the Federal Deposit Insurance Corporation’s (FDIC’s) Problem Bank List. Additionally, the report found a statistically significant likelihood that banks with higher FHLBank borrowing in a given year are less likely to fail than banks with lower FHLBank borrowing in a given year.

Policy Considerations

The report examined potential concerns that stakeholders may have regarding the FHLBanks, outlined proposed reforms and examined the potential negative impacts of these proposed reforms. GAO cites six specific concerns that observers have noted: (1) FHLBanks can be perceived to have an implied guarantee given they are government-sponsored entities, which could lead to FHLBanks promoting greater risk taking by members; (2) FHLBanks offering lower pricing than other liquidity sources could lead to banks delaying balance sheet recognition of certain losses or make it less likely that banks would turn to the Federal Reserve as a lender of last resort; (3) due to the FHLBanks cooperative structure, they may be more willing to lend to risky members; (4) the FHLBanks “super lien” could incentivize more high-risk lending because they are less exposed to potential losses than other creditors; (5) collateral-based lending could make the FHLBanks less likely to account for members’ credit risk; and (6) FHLBank lending is less transparent than the discount window.

GAO addressed these concerns through eight suggested policy reforms to FHLBank lending and examined the potential impacts of these proposed reforms. They grouped the eight reforms into four areas, which are highlighted and examined below:

Increasing Federal Banking Regulators’ Role in Lending

Some stakeholders have suggested that the federal banking regulators should have an increased role in FHLBank lending by having approval over advances to member banks under certain circumstances, the ability to restrict access to FHLBank advances when a bank’s condition deteriorates and the ability to impose fees on banks that rely heavily on FHLBank advances. GAO notes that bank regulators are already permitted to make interventions to FHLBank lending under certain circumstances, effectively making these proposals duplicative. While the report notes that these changes could increase communication and give banks better access to the discount window, there were a number of issues that could result from implementing these changes. Specifically, increased liquidity delays, disruption to many banks’ business model, decreased lending capacity for member banks, conflicts of interest for bank regulators and inadequate resources at the banking regulators to enforce these policies.

Increasing FHLBanks’ Accountability for Lending

Observers have also suggested policy reforms that are intended to increase FHLBanks’ accountability for lending by altering how FHLBanks are paid out following the failure of a member bank, including eliminating the “super lien” and altering disclosure requirements for FHLBank borrowing. GAO notes the proposal to change how FHLBanks are paid out following a bank failure is unnecessary because changes to the Uniform Commercial Code (UCC) in 2001 essentially render the “super lien” ineffectual, aside from extremely rare situations. Altering the payout structure for FHLBanks following a failure would also shift credit and market risks from member institutions to the FHLBanks, which could ultimately restrict their ability to lend. GAO also notes that the proposed changes to FHLBank disclosure requirements are duplicative, and without adequate context, such disclosure could exacerbate stress and increase the risk of bank runs.

Limiting FHLBank Lending During a Crisis

Another policy suggestion would be to replace FHLBank lending during a crisis with Federal Reserve lending. While the report notes this policy could improve clarity, it also notes implementing this policy would likely do more harm than good, as it is unknown if the Federal Reserve has the ability to implement this reform, and there are serious questions about how to define the beginning and end of a banking crisis.

Altering the Pricing Structure of Advances

Finally, stakeholders suggested the FHLBanks could alter the pricing structure of advances by setting the advance rate higher than the discount window’s primary credit risk rate and tailoring advance prices to the credit risk of the member requesting the advance. GAO raises several concerns as to why setting the advance rate higher than the discount rate would be misguided. Raising the advance rate “would disrupt FHLBanks’ role as routine liquidity providers, potentially reduce the volume of FHLBank advances, or lead to less business and consumer lending by small member banks.” Additionally, raising the advance rate could create market distortions and hinder the FHLBanks’ ability to compete with market-based alternatives. The report notes that the FHLBanks already take some steps to offer different prices for advances based on member credit risk and FHLBanks can account for credit risk in other ways besides pricing.

FHLBanks and Bank Agencies Ongoing Coordination Efforts

For the final section of the report, GAO analyzed ways the FHLBanks and federal banking agencies, especially the Federal Reserve, communicate and coordinate with each other currently, and steps they are taking to make this coordination more effective. The FHLBanks, along with the Federal Housing Finance Agency (FHFA), meet annually with the prudential bank regulators where they cover topics including membership trends, lending practices, regulatory changes, market trends and emerging risks. The report highlights some of the coordination issues that occurred during the 2023 bank failures and illustrates steps the FHLBanks and the Federal Reserve are taking to improve this coordination in times of crisis. GAO finds that coordination between the two entities can be difficult because of the complex nature of the FHLBank and Federal Reserve systems. Since 2023, the FHLBanks and the Federal Reserve system have taken two key steps to improve coordination. The first action is increasing engagement between the regional banks that share members. The second action they have taken is to establish a working group aimed at improving interoperability between the regional banks of the Federal Reserve and the FHLBanks.

Key Takeaways

The report finds that the FHLBanks are a key part of the U.S. banking system and a dependable source of credit for banks of all sizes. GAO data shows that banks’ reliance on FHLBank advances has remained broadly stable over time, even during crisis periods, with spikes in aggregate borrowing largely driven by a small number of large banks. Analysis also suggests that higher FHLBank borrowing is typically associated with positive outcomes, particularly for smaller institutions. While certain groups have proposed reforms to FHLBank lending practices, GAO notes these could carry unintended consequences or duplicate existing oversight. Finally, the FHLBanks, the Federal Reserve and the other bank regulatory agencies have taken steps in recent years to improve coordination that is critical for managing liquidity during periods of financial stress.

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