FHFA Issues Guidance for FLHBanks When Providing Liquidity

Posted: Oct 09 2024

The Federal Housing Finance Agency has issued guidance for Federal Home Loan Banks to determine a financial institution’s creditworthiness when providing liquidity. The guidance is meant to emphasize the FHFA’s “longstanding expectations that an FHLBank’s underwriting and credit decisions should reflect a member’s financial condition and not rely solely on the collateral securing the member’s credit obligations,” according to the document.

The guidance provides an overview of FHFA’s expectations for the components of the FHLBank’s member credit framework, including credit risk governance, member credit assessment and monitoring of credit conditions, according to the document. It also outlines key elements in the oversight of troubled members, including escalation policies and procedures, coordination with members’ prudential regulators, and default/failure/insolvency management policies and procedures. Finally, it includes instructions for the FHLBanks to coordinate with members’ primary regulators.

“Today’s advisory bulletin on member credit risk management promotes the FHLBank System’s ability to fulfill its function as a reliable source of liquidity throughout the economic cycle,” FHFA Director Sandra Thompson said. “This guidance provides clarity for the FHLBanks’ effective management of credit risk and coordination with other financial regulators so that member institutions can maintain the ability to access liquidity when needed.”

FHFA added that it recognizes the importance of the FHLBank system’s function as a source of liquidity for its members — including small, community-based financial institutions—and that it expects FHLBanks to continue in that role. “This role is particularly important during periods of market stress, such as during the regional bank failures of March 2023,” the agency said.

To read more, visit: https://www.fhfa.gov/sites/default/files/2024-09/AB-2024-03_FHLBank-Member-Credit-Risk-Management.pdf