FHLBanks promote stability during liquidity challenges

As the saying goes, a person is entitled to their opinion, but not their own set of facts. A recent opinion piece published here lays on a display that frankly cannot be left unchallenged. 

The piece charges that the actions taken by Silvergate Bank to address a temporary liquidity event created when its depositors withdrew funds following the collapse of FTX Trading Ltd. have exposed fatal flaws in the Federal Home Loan Bank (FHLBank) System. 

The suggestion that somehow the activities of the FHLBank San Francisco — a privately capitalized cooperative liquidity provider — placed the taxpayer in jeopardy to “bailout” Silvergate Bank could not be further from the truth.   

It went on to suggest these transactions received no scrutiny from the Federal Housing Finance Agency, the Federal Reserve, the Federal Deposit Insurance Corporation or the California Department of Financial Protection and Innovation. Worse, it suggested that the loan made to Silvergate Bank recklessly exposed U.S. taxpayers to subsidizing losses arising from the recent meltdown in the crypto markets.

On the contrary, the steps the FHLBank San Francisco took to serve its member — including the coordination it has had with Silvergate Bank’s prudential regulators — are an example of how the system is intended to work.   

The loan proceeds (referred to as “advances”), which are secured by high-quality, housing-related collateral, reassured depositors and deterred further withdrawals. (Importantly, crypto assets were not pledged and are not eligible collateral for FHLBank advances.)  

Silvergate Bank, a member of FHLBank San Francisco since 1997, has honored the terms of the advances, and the FHLBank has been in very regular contact with the bank, as well as federal and state regulators, any of whom could have prevented the advances at any time.   

This is precisely what Congress intended when it originally created the FHLBanks during the Great Depression — when bank runs were common, and liquidity issues quickly became solvency crises.  

The result? A bank that might have been troubled has been able to manage its liquidity challenge over time. If the FHLBank hadn’t been there, this situation may have put the FDIC on the hook. That hasn’t happened because the FHLBank was there.  

This episode highlights a success story of well-established and well-executed safety and soundness processes for FHLBanks lending which includes coordination with the member’s prudential regulators.  

It demonstrates the relevance of the unique public-private system of cooperatives that was established more than 90 years ago with a mission to ensure a reliable and readily accessible flow of liquidity into the U.S. financial system. Liquidity mattered then, and liquidity matters now.  

Working together with their members — banks, credit unions, insurance companies and community development financial institutions — and appropriate regulators, the FHLBanks continue to serve as a reliable source of liquidity when needed in all operating environments, thereby promoting stability in the financial system. 

Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks.