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The primary mission of the 12 cooperatively owned Federal Home Loan
Banks (FHLBs) is to provide their members financial products and
services to assist and enhance member housing finance. In this
paper, we consider the role of the FHLBs' traditional
product--"advances," or collateralized loans to members--in
stabilizing commercial bank members' residential mortgage lending
activities. Our theoretical model shows that using membership
criteria (such as a minimum of 10 percent of the portfolio being in
mortgage-related assets) or using mortgage-related assets as
collateral does not ensure that FHLB advances will be put to use
for stabilizing members' financing of housing. Indeed, our model
demonstrates that advances--a relatively low cost managed
liability--are most likely to influence lending only when such
liabilities are used to finance "relationship" loans (i.e., loans
to bank-dependent borrowers) that will be held on a bank's balance
sheet and are least likely to influence lending for loans where the
loan rate is heavily influenced by securitization activities, like
mortgages.
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