Federal Home Loan Banks and Financial Stability.

This article focuses on the Federal Home Loan Banks (FHLBs), government-sponsored enterprises (GSEs) established in 1932 to promote economical housing finance, whose original mission has become largely obsolete due to changes in mortgage markets. The FHLBs operate as public-private hybrids: they are privately owned and governed by their member institutions but benefit from significant public privileges, including an explicit line of credit from the U.S. Treasury and an implicit government guarantee of their debt. This hybrid structure has enabled the FHLBs to expand their activities beyond housing finance, increasing maturity transformation and reliance on short-term funding from money market funds, which can amplify financial instability during periods of stress and complicate the missions of federal financial regulators. The article argues for regulatory reform by the Federal Housing Finance Agency (FHFA) to enhance transparency, strengthen liquidity and capital requirements, and coordinate with other regulators to mitigate systemic risks, while also suggesting that Congress reconsider the FHLBs’ role and public subsidies in the contemporary housing finance system.