Back in 2008, in the height of the financial meltdown, banks were scrambling to find money as customers were pulling out their deposit fearing bank insolvency. We witnessed giants such as Bear Stearns, Lehman Brothers, Washington Mutual, Wachovia, IndyMac and dozens of other financial firms fail due to this as well as over leveraging and liquidity issues. At the time, these banks were struggling to find funds to shore up financial shortcomings. While most think of the Fed as the lender of last resort, there is another Government Sponsored Enterprise (GSE) that has a significant impact on the wellbeing of banks in the United States: The Federal Home Loan Bank. Created in 1932, the FHLB, is a cooperative lending facility made up of 11 regional banks. In short, they are a privately held business which issues bonds to raise capital that is lent out (Advanced) to member banks. The banks secure these loans with mortgages they hold or other eligible types of collateral. As you can see on the chart below, as the markets were starting to fall apart in 2007, the dollar amount of advances taken by banks surged from $624 billion to over $1 trillion by Q3 of 2008. As the market was in freefall in 2008, FHLB stopped lending the banks money as credit ratings were being slashed, and collateral dried up. Remember, at the time, this was the greatest economic downturn since the Great Depression.
