The Federal Housing Finance Agency issued informal enforcement actions against the Federal Home Loan Banks of San Francisco and New York for violating regulations and failing to stop lending to banks with rapidly declining financial and liquidity conditions,
The report released Tuesday stated what many in the industry
In the months before the failures, all of the banks substantially increased borrowings from the Home Loan Bank System to offset deposit withdrawals. The FHFA, led by Director Sandra Thompson, oversees Fannie, Freddie and the 11 regional Home Loan banks.
The Home Loan banks failed to stop lending to member banks that were experiencing rapid deterioration in their financial condition. Two of the four failed banks, which the report did not identify, unsuccessfully tried to borrow an additional $20 billion in the days before failing.
One Home Loan bank lent $5 billion to a failed bank "on the last business day before its failure and treated the bank as a member in high standing," the report found. Another failed bank borrowed $10 billion in March and the unnamed Home Loan bank "continued to rate it highly until the day before it failed," according to the report.
"The highly stressed, rapidly deteriorating environment of March 2023, and FHLBank management's responses to the spike in advances requests from failing members, exposed weaknesses in member credit risk management at certain FHLBanks," the report stated.
The report didn't specify what actions were taken against the San Francisco and New York Home Loan banks.
The Home Loan banks have been criticized for acting as a lender of last resort. Some large banks "did not have agreements in place or collateral positioned to allow for borrowing from the discount window," the report found. As a result, those banks were "overly reliant" on the Home Loan Bank System for emergency funding.
The Federal Reserve's top regulator has said that
Going forward, the FHFA plans to issue an advisory bulletin on credit assessments by the end of the third quarter. FHFA's management has acknowledged that the agency lacks "a practical approach" for ensuring exam guidance is reviewed by examiners and, as a result, management doesn't really know whether risks are overlooked, the report found.
Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, said there are many lessons to take away from the March 2023 banking crisis.
"If the FHLBanks hadn't been able to meet their members' liquidity needs, the focus wouldn't be on just four failed banks — it would likely be on many more," Donovan said. "As policymakers implement the lessons learned from this crisis, it is crucial that the FHLBanks' role as a stabilizing force during market disruptions remains intact."
A spokesman for the Home Loan Bank of San Francisco said the bank worked collaboratively with FHFA through the market disruption last year.
"We have maintained long established processes for transferring collateral to the Federal Reserve Bank at a member's request and the process worked well for those members that had set up their relationship with the Fed during the market disruption, as noted by the Government Accountability Office's report in April of this year," the spokesman said.
One nugget from the report came from the deputy director of FHFA's division of bank regulation, who said the greatest challenge was that key individuals were relatively new to their positions and did not have relationships with other regulators. When regional banks were in free fall in early 2023, Home Loan bank officials and a regional Federal Reserve bank did not have each other's contact information and were coordinating with each other through the FHFA.
The report found that the FHFA did not have internal guidance to identify and facilitate contact points among regulators to address stressed and failing members.
