YouSaid · the spoken record

Kathryn Judge

lines on the record: 90
first: 2023-07-03
most recent: 2023-07-03
sittings or episodes: 1
sources: podcast

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“Compensation for the leadership is much greater than it is even at the reserve banks, which is better than it is, you know, at the Board of Governors. But they also have a lot of incentive compensation that's really about increasing profitability and not taking too much risk. And that is part of why they're loaning money that's going to large institutions and that is very well collateralized. And that does in some ways reduce the risk that federal home loan banks are exposed to. It increases their profitability because again, they have the biggest source of their profitability is the fact that they're able to issue debt with the implicit government backstop. And we can go into that more if you want to as well. The changes in the money market fund rules also created new demand for the instruments that they issue. But so there's a, on one hand, they're issuing effect.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“I mean, I think it's profit and stability here actually can go hand in hand, but they can go hand in hand in ways that work contrary to what I think are the better aims of the federal home bank system. So first of all, if you look at it the”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“But how big is that system? In other words, if you have the Federal Reserve, they make decisions to, you know, I mean, they have their dual mandate of low unemployment and stable inflation, as well as financial stability. If they're making a loan, it's just kind of help the system, even though that may have consequences down the road, moral hazard. And a private bank, obviously, they're doing it to make money. Where is the federal home loan bank on that spectrum? Because it has people who are they doing loans to make money. Is it profit driven or is it stability driven? And yeah, I mean, what happens when those incentives clash?”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“And so the Federal Reserve, I think technically it is still the case that it is privately owned. So JP Morgan owns a stake. Other banks own a stake, but they get some sort of nominal dividend. And Jamie Diamond is not calling J Palace saying we need more. It is a public entity. And that really is kind of just like a formality. Whereas the Federal Home Loan Bank also equity ownership is in the member banks. And so I think the largest holders are the major bank, Wells Fargo, JP Morgan, Bank of America. But they also get a percentage of the profits.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“To members of the Board of Governors who are presidentially appointed and Senate confirmed. So we've really had a system that started as a public-private system become increasingly public and increasingly accountable to the public over time. The federal home loan banks, that hasn't happened at all. So you still have much of the majority of the board is member institutions. And as a practical matter, they're making decisions that benefit member institutions. So not only do they have access to advances on these very favorable terms, you know, they are also earning a very nice rate of return. A lot of it's getting passed on to dividends to members. So kind of the public benefit of what they do is much smaller than the private benefit that accrues to members.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Pentagon, which one you're talking about, regional banks that scattered the country, much of the board of directors of those regional banks were from member institutions, along with some public representatives. And then you had this DC oversight board overseeing operations. But we've really seen happen with the Fed over time is the role of the regional banks, not regional in the community regional distinction, but instead the role of the banks that are members of the Fed has declined significantly. And the public facing role of the Fed has increased significantly. And this has happened through changes in the law and also changes in norms. I mean, it's clear in even like the voting structure of the FOMC, where seven of the 12 votes go.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, though a fun little tidbit is precisely because of this, you know, borrowing money from the Fed was one of the other mechanisms along with borrowing them from the federal home loan banks that potentially increased losses to the insurance funds FSLIC and FDIC over the SNL crisis. And so that's actually when Congress went in and required the Fed to actually care about the health of the institutions on the other side. So up until that point, discount window borrowing, there was no actually obligation to consider the health of the institution. That was changed somewhat in Korea and then subsequently, I believe as FIRA, but was certainly part of the SNL reforms. And then further refined during Dodd-Frank. So the Fed, I think, generally speaking, just has a better set of incentives. So if we think about the two different structures, even just as a governance matter, both of them started off looking quite similar, right? There were 11 or 12.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Which means any advances outstanding to the federal home loan banks get paid back in full before the FDIC or any depositors see a dime. So as a practical matter, when a bank fails, even if it's IndiMac, even if the bank was significant losses, they have more than enough assets to at least pay off the federal home loan banks. But then that means there's less money left over, there's less assets left over for the FDIC and for other depositors if there are unintro depositors. So the federal home loan banks get made whole, but it's not because they're doing a great job with risk management. It's certainly not because they're actually monitoring the credit worthiness of the banks borrowing from them. It's because they have this incredible statutory advantage.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“So they have, then they love to advertise this. They have never lost a cent on any advance to any bank because that is the natural question, right? It's like, why are they failing like making loans to all these failed banks? Aren't they eventually going to struggle as a result? Two key reasons. One, they do demand a lot of collateral and they increase haircut during periods of stress, which is actually the right thing if what you're doing is kind of engaging in your own risk management techniques. It's the wrong thing to do if what you're supposed to be doing is a public serving role of increasing liquidity during periods of distress. So one, they demand a lot of collateral. They increase haircuts during periods of distress. And that covers much of their position. Second, and also quite importantly, they have what is often called the super lean.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Right, and I think it's roughly accurate to say that the advance rate, the rate at which the federal home loan banks lend to private banks is roughly equivalent to the federal Fed funds rates, you know, plus a few basis points or something like that. So when interest rates were at zero, it made sense for JP Morgan to borrow from the FHLB a little bit above zero. And I was originally confused as to why JP Morgan was one of the biggest borrowers, but interest rates were at zero. Now that the interest rate is at 5.25%, the only reason why banks would borrow at 5.25% is if they have other alternative, whereas JPMorgan, Bank of America, they've still got millions of people willing to deposit money at essentially zero interest, whereas a lot of regional banks don't. Tell us about what happens if the loans go bad. So far, credit loan performance has been very good. Not a lot of defaults really at all. In some cases, defaults are”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“In ways that aggravated the size of the crisis that followed. So a little liquidity can be good and stabilizing things, but they can also make it easier for policymakers to ignore just how big of a challenge they're facing.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Term auction facility. This was the Fed's effort to create a destigmatized alternative to the discount window to provide more liquidity into the banking system in late 2007. So it was one of the early efforts by the Fed to say, look, we need to be doing more. But part of what's interesting is the Fed just doesn't have direct connection. They can ask for the information, but they're not paying as much of attention to the federal home loan bank borrowing. And it doesn't put them in that sore spot of actually trying to figure out like, is there something bigger here that we really need to deal with? And so I would again, for 2007, 2008, I would argue that part of the challenge is delaying things from August 2007 to when things really exploded with Lehman and AIG in September 2008 actually allowed the overall system to become more fragile and banks to become even more undercapitalized.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“For advances, which are kind of the term for the loans from the federal home loan banks, that's a sign that the banking system as a whole is in trouble. So part of what we have is like more liquidity and that allows things to go on. But sometimes you actually don't want things to kind of go on. You want policymakers to be forced to deal with the fact that they're facing a bigger challenge. So going back to 2007 and 2008, it definitely ease financing conditions in October and November of 2007. The”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yes, exactly. But you can also see that when you look at the federal home loan bank system with the old. You look at the end of 2021 and it's largely large financial institutions. So it's JPMorgan and MetLife that are among the top five borrowers from the Federal Home Loan Bank system. You look at the end of 2022, which is long before we got into the March turmoil. It's Wells Fargo and four regional banks, right? So this is an early warning signal that would have been available to the Fed potentially even earlier that look regional banks are actually facing trouble. Like regional banks are substantially increasing their borrowing from federal home loan banks. And we saw that happening across the way. And we saw that happening with particular banks. And it's not a red flag saying, okay, these banks are guaranteed to fail, but it is a very meaningful yellow flag that we know very often before banks fail, they significantly increase their alliance on federal home loan borrowing. And when there's system-wide demand.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Individual banks, you'll get something like the Federal Home Loan Bank of San Francisco, SVB wasn't a borrower at all at the end of 2021. It was the biggest borrower at the end of 2022.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“And that's certainly true. But part of what we see, first of all, is, as is the case right now, trouble banks borrow more. So if you look at the SNL crisis, thrifts had actually failed were far more likely to borrow from the federal home loan banks than the thrifts that didn't fail, and they borrowed more than the thrifts that didn't fail. If you look back at 2007 and 2008, IndyMac, Washington Mutual, countrywide, like all of the banks that got in trouble were also all of the banks that were the biggest borrowers from the federal home bank system. And just as importantly, and this is another core challenge, it puts the Fed one step to remove from understanding where the acute challenges might be and how big the challenges might be that the banks are really facing. So, you know, you actually look at the reports from the where things stood at the end of 2022 for the federal home loan bank system. And first of all, if you can look at”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Months leading up to then the failure of Lehman Brothers. So we had a long run up actually during that period of time. And what we saw is that banks turned to the federal home loan banks. So very early on in 2007, there was a dramatic increase in the borrowing from the federal home banks. And that continued to be true throughout early 2008. So it wasn't until probably May 2008, a couple months after the failure of Bear Stearns that the various Fed facilities actually had more borrowing going through them than the federal home loan bank system. And in some ways, you could say this is good because we want more liquidity in the system. So the people who defend the federal home banks say, look, like liquidity is really important when banks have access to liquidity, that smooth market functioning, and it allows them to lend on funds in ways that help them to support the real economy.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“And this is exactly what we've seen in the past. So you noted earlier that the federal homeland banks have been playing a much bigger role than the Fed in loaning in to the current banking crisis. The same thing happened in 2007 and 2008 and actually the same thing happened in a different way during the SNL crisis. So if you go back to 2007, 2008, really the crisis kicked off in August 2007. I tend to date it the failure of the BNP funds. We saw a dramatic contraction in liquidity. We had the Fed cutting rates and trying to open the discount window and really recognizing there was a meaningful liquidity event. So August 2007 is where suddenly things started to look bad. And liquidity conditions remain strained for the 13.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I guess where are we now? It's fair to say that the commercial banks have, regional banks have borrowed a ton of money from the federal homeland bank to replace the deposits that have left the banking system, right?”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so there was some expansion in the types of assets, and there was further expansion in Graham Leach Blyley as well. So you look at kind of almost a lot of the major banking acts. Oftentimes there's modifications to the federal home loan banks as well. So some of it was done as part of Forea in 1989. Some of it was done a decade later as part of the broader deregulation of Gram Leach Biley. But over time, you see a significant broader set of assets you can post at collateral. So for example, today, about 20% of the collateral that federal home loan banks are holding is commercial real estate.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“So there was an expansion of who could join the federal home loan bank network. Was there other deregulation of, oh, now you could make you can lend against other assets, not just residential mortgages”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so the big change was they said, look, rather than getting rid of the federal loan bank system, even though the original justifications for it have largely disappeared because the differences between thrifts and commercial banks are much smaller than they used to be, and thrifts now have the ability to go directly to the Fed for additional financing. Instead, we're actually going to expand it. And again, we're expanding it in part because we have an interest in housing finance. But really the prim we're expanding it is we want to be able to have a mechanism for cleaning up all of these insolvent thrifts without it actually acknowledging that we're doing it. And so really it was a balance sheet gameship that drove the expansion and evolution of the federal home loan banks.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“So, this system allowed a little bit more generous and easy lending to the system. Whereas in the rest of the, a lot of the rest of the world, there's not that. There's no Fannie Mae, I don't know, federal homeland banks. So you actually still have that structure where, oh, you're borrowing for five years, 10 years, the 30-year fixed rate mortgage is somewhat rare in the world, although it's very popular in America. Okay, so now let's go back to the 1989 regulation. What were those changes now that we have that information?”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so originally it was just residential mortgages. And because they partly wanted there to be incentives for people to create kind of residential mortgages that better suited the needs of ordinary Americans, they allowed the haircuts to be slightly smaller when you had slightly longer term amortizing loans. So if you had a loan that was more than eight years and it was amortizing, which just meant that the person who bought the home was able to have those monthly payments reduce the principal that they owed alongside paying off interest, well, they were able to loan to borrow up to 60% of the face value of that loan.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Wealthy individuals, and at times sellers. Yeah. So it was a huge part of the market. So that was part of what was interesting when we created the Federal Home Loan Bank. It was a little bit of a shift towards more financial mechanisms and institutional mechanisms for the mortgage market. So they didn't allow commercial banks to be members because at that point by law, they actually weren't even allowed national banks, at least were not allowed to engage in any mortgage lending state banks had varied a little bit, but they weren't playing a significant role. Thrifts were playing a big role. And actually insurance companies played a role largely in the secondary market because, again, they had the ability to hold on to those slightly longer term assets. So it was actually all insurance companies and thrifts that were allowed to become members of the federal home loan banks.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“As a mutual that existed for a finite period of time. So members would pool their money together, commit to making regular payments into this entity, and then there would be an auction over who kind of got to be next to borrow enough money to buy or build a home. And then over time, they evolved to be slightly more resilient structures where members could come and go over time and the entity continued to exist. But throughout it was much more kind of the George Bailey model where you didn't have demand deposits, but you could get your shares back usually with 30 or 60 days notice. It was really serving the interests of middle class and Americans. So you can go back and look at surveys of who the borrowers were. They were working in factories. They were working as housekeepers. They were working in various roles like that. And generally speaking,”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yeah. So it was individual lenders, actually. So you had kind of the person selling the home and at times wealthy individuals. But as a result, you had very little ability to access mortgage financing. It varied a lot by the region of the country that you're in. And most of the mortgage financing available had periods of less than five years. And they were interest-only loans. So you were able to times get a loan, but you might have a period of, you know, four years or five years. You would have to come up with a 50% down payment was typical. And then you would have the entire principal due at the end of it. So you had very limited access to housing finance. Thrifts came in starting a few decades before that. It was actually modeled on something similar that had happened in the UK. And so you had actually two British factory owners in Pennsylvania set this up effectively for the workers and the model spread were originally it operated”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“I love that you're asking that question because I think that shows how much thrift has effectively become like banks, which they really have. So originally, commercial banks were just much more focused on serving commercial interests. And so they really focused on figuring out how they could serve the needs of businesses and to a lesser degree wealthy individuals. So it was up to other mechanisms to generate ways that ordinary Americans could accumulate wealth and more important access housing financing. So if you go back to when we first had the federal home bank system like 1932, first of all, individuals played a huge role in the mortgage market. They were about 40% of the mortgage market. And that was declining from what had been closer to 70 or 80 percent. So insurance borrowers in the market.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“To pay off these bonds. They're like, well, you have to allow it to grow. So, right when kind of the distinction between thrifts and banks was dissipating, at this point, thrifts had direct access to the Fed. They'd been given that in 1980. So the reasons for the federal home loan bank system were actually kind of going away. We also had Fannie Mae and Freddie Max. We had a lot more support for residential lending generally. So we had a lot less reason to actually need the federal home loan bank system, reasons potentially get rid of it. Instead, we did just the opposite. We suddenly allowed commercial banks as long as they did a modest amount of residential lending when they first became members to join the federal home loan bank system. And so instead, it got much bigger and it also really became unmoored from that original focus on trying to promote more accessibility to housing finance and more affordable homes.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“All of the insolvent thrifts that are out there. And their solution was the federal home of banks. So the federal home loan banks, like Fannie Mae and Freddie Mac, before they were put into receivership are government-sponsored enterprises, which means they're able to issue debt where there's an implied government backstop that allows them to issue debt on much more favorable terms. But at the same time, they are not actually consolidated. And so they're not considered on balance sheet for the perspective of the federal government. So what the federal government said is like, we're going to acquire the federal home banks and thrift to put some money into this fund. But the real way we're going to fund the cleanup is by issuing these ref court bonds. And RefCorp was basically a shell corporation, but then it put a burden on the federal home loan banks going forward to pay off those bonds over time. And then Congress said, well, how are we going to allow the federal home loan bank system to generate enough revenue?”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so the federal home on bank system made a lot of sense. And then the real challenge came, the kicker came in 1989. So the SNL debacle had been growing for a period of time. We had insolvent thrifts. And at that point, they had a separate insurance fund for thrifts that was different than the FDIC. And that insurance fund just didn't have enough money to close all the insolvent thrifts. And for a while, you know, Congress hoped that the deregulation would allow these troubled thrifts to earn their way back to health. But of course, they just dug themselves in deeper as they took on greater and greater risks. And so finally, Congress said, all right, we have to really clean this up, but it's going to cost us something. And they didn't really want to have to pay that through the normal mechanisms because, of course, they were trying to hit deficit reduction targets. And so they're like, all right, well, how do we hit our deficit reduction targets and pretend that we're, you know, not actually increasing spending while still coming up with the funds that we need to clean up.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“When it comes to liquidity provided to banks, the federal home loan bank system really is number one compared to the Federal Reserve. I mean, right now, the Federal Reserve via discount window and bank term funding program has lent a little over $100 billion, whereas this year, I think the federal home loan bank system, all the branches have borrowed $600 billion and have an outstanding note issuance of over a trillion dollars. And they're issuing those advances to the bank. So it really is not the only game in town, but really the number one game in town when it comes to providing liquidity to banks. So Professor, in your article about the problem lender of second to last resort, you note that Congress provided some perhaps deregulation or some changes to the federal home loan bank in, I don't know, maybe in the 1980s, you tell me, and this causes a series of problems that the Federal Home Loan Bank has moved beyond its original intent and it”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Federal Home Loan Banks don't have the stigma associated with discount window borrowing, but what we can consistently see is during periods of distress, all banks and in particular troubled banks substantially increase their reliance on federal home loan bank borrowings. So it's a way of accessing greater liquidity without having to go to truly market-based sources of funding.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so I think about the Fed as being the very last resort. It's where you go when you have absolutely nowhere else to go. And what we've traditionally seen banks do, they've been doing it during this episode. They were doing in 2007 during 2008. They did it during the SNL episode we talked about earlier. Before they go to the Fed, before they go to the discount window and admit that they really need help with liquidity, they go to the federal home loan banks. So they take the residential mortgages, they take commercial real estate, sometimes small business loans, and go to their federal home loan bank and say, you know, can you provide us some additional liquidity as we post these assets as collateral? Part of what we see is banks do use the federal home loan banks to diversify their sources of funding, even in normal period. So it's not unusual for banks to borrow from the federal home of banks. And that's one of the reasons that Barrowing for the”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Significant challenges. Housing was facing significant challenges generally. Construction was down. Housing starts were down well over 90%. So this was actually under Hoover really started the efforts towards what we later on think about as a new deal and said, well, we need to find a way to support housing finance and to provide liquidity to these thrift institutions. And so they set up a system of at that point 11 regional banks under the oversight of the federal home loan bank board. And those banks could obtain advances, so effectively collateralized loans from their regional federal home loan bank. And so it was, again, similar to the Fed, but slightly different in the sense it was serving thrifts and also different in the sense that right from the beginning, part of the aim was to increase access to housing finance. So there were longer term loans than you ever had at the discount window.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so the federal home and bank was created in 1932, and it was designed in large part to be a parallel to the Federal Reserve, but one that served thrifts and one that accepted mortgages as collateral. So at that point in time, we had 12 regional Federal Reserve banks battering the country. A lot of the control was actually still in those regional banks, but there was still real bills doctrine era. You know, they were really focused on commercial credit. And they only allowed commercial banks to be members. And we'd had a rapid growth in thrift institutions in the decades leading up to the depression. But those thrift institutions were not allowed to be members of the Fed. And their assets were largely mortgages, which they could impose as collateral. So it also limited their ability to rely on banks to intermediate their access to the Fed. And as a result, they were facing”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“But you got a lot of opinions about the federal home loan bank, and you think there are some abuses within the system. So, first of all, let's just start. What is the federal home loan bank and how large are the borrowings that the regional banks are borrowing from them? How much are they relying on them right now?”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“The SNL is the savings and loan crisis of the 80s and 90s. And you said banks can make more loans at higher yields, but that is, of course, if the economy continues to do well, if the economy doesn't, they might not want to make those loans because they might not be paid back. And of course, their cost of funding for the regional banks really has skyrocketed it as money is leaving the banking system, deposits are leaving the banking system. And they're replacing them with federal home loan bank borrowings. And from the federal reserve. And as a financial journalist, I'm covering so much about the federal reserve, but really the amount of lending that the federal reserve has done to the banking system in terms of the discount window and the new bank term funding program is really dwarfed by the borrowings from the federal home loan bank, which you see on financial documents and reports, federal home loan bank, but you always wonder what is it the federal home loan bank. And you're someone who you not only study this great.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“And we're seeing it play out right now with regional banks and the regional banks, of course, have the additional challenge that they're holding on to a lot of commercial real estate and other assets that might have credit issues as well. So you put all the different pieces together. And I think the regional banks are still facing a lot of challenges, whereas community banks and the GSIBs seems to be weathering this relatively well.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Uneven. So, what we're really seeing right now is incredible challenges of the banking system, but those are largely concentrated in the regional banking sector. We've seen, naturally speaking, when interest rates go up, that creates both opportunities and challenges for banks. It oftentimes creates opportunities because they're able to increase what they're getting on the asset side without necessarily passing along the change interest rates on the liability side. So you can actually see increased and profitability as interest rates go up. But of course, there's a diminishing point over how long they can do that. And as those assets keep going down in value, they're going to be rendered weaker. Some of them are going to be insolvent. And suddenly some depositors are really going to want a little bit more. And so we saw this play out in the SNL crisis really throughout the 80s.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT