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FHLBank Debt
Why Federal Home Loan Banks Issue Debt
The Federal Home Loan Banks (FHLBanks) advance funds to their members, who in turn, lend funds to consumers for home mortgages, small businesses, community development and agricultural loans. The funds that FHLBanks lend to their members are primarily raised through the daily sale of debt securities in the global capital markets.
What Kinds of Debt Are Issued
There are two kinds of consolidated obligations: consolidated bonds, which have maturities of one year or more and consolidated discount notes, which mature within 360 days.
How Consolidated Obligations Are Sold
FHLBank consolidated obligations are sold to institutional investors through the Office of Finance. The Office of Finance, which handles FHLBank transactions, is able to sell the debt at rates just slightly higher than Treasury bonds because FHLBank products are rated Aaa/AAA by Moody’s and Standards and Poor’s. At the end of 2003, these securities totaled more than $740 billion outstanding.
Why the Banks Issue a Mix of Short and Long-term Debt
Each year the FHLBanks issue a varying amount of Consolidated Obligations. Much of it is in short-term discount notes that mature or are paid off within a year. The FHLBank System’s issuance of debt is heavily influenced by its use of short-term discount notes, which in turn is influenced by the growth in FHLBank membership and the demands of member banks. The Bank System’s use of a variety of debt issue terms is an efficient, prudent interest rate risk management tool.
The FHLBanks frequently borrow short, primarily in the form of discount notes, while our membership tends to lend long, primarily to fund 15 to 30-year mortgages. At first blush, this may appear to be a term mismatch, but it’s not. In fact, the FHLBank System intermediates on behalf of its members to reduce term mismatch risk and provide liquidity.
FHLBanks don't fund individual mortgages. They fund mortgage pools. Since these pools are constantly changing, they have no maturity. Consequently, the many term rates FHLBanks issue reflect their member needs, including the advances they use to minimize their own interest rate risk.
The FHLBanks are not the only prominent financial institution that operates this way. The U.S. Treasury does it, too.
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