Wall Street Warns of Risks in Push to Rein In Home-Loan Banks

A push by US regulators to rein in the Federal Home Loan Banks risks casting broad ripples through the US financial system, increasing costs to banks by pulling a major force from the nation’s funding markets.

That’s a key takeaway from Wall Street strategists after the Federal Housing Finance Agency released a report this week that called for limiting access to loans from the banks.

The so-called FHLBs, created in the 1930s to help finance Americans’ home purchases, in recent decades have steadily expanded their scope, morphing into a linchpin of the loan markets where banks turn to borrow short-term cash. That role has drawn heightened scrutiny after they lent heavily to Silicon Valley Bank, Signature Bank and First Republic Bank as they careened toward collapse, underscoring how the system is encroaching on the Federal Reserve’s role as a lender of last resort.

The housing agency is now looking to ensure that banks turn to the Fed during times of stress instead of the FHLBs, which extended massive amounts to banks earlier this year as fearful depositors yanked out cash on fears of an escalating crisis.

Gennadiy Goldberg, head of US interest rates strategy at TD Securities, said limiting the scope of the FHLBs may cause banks to stockpile cash during times of crisis, given the market stigma associated with turning to the Fed for emergency loans.

“The change could lead to banks hoarding additional liquidity during times of stress,” he said. “This could serve to increase banks’ liquidity needs and could exacerbate market volatility during times of stress as banks will be reluctant to tap Fed facilities quickly.”