Federal Home Loan Bank members should be allowed to use short-term FHLB letters of credit to secure advances through the Federal Reserve’s discount window, the Council of FHLBs suggested in a recent letter to Federal Housing Finance Agency Director Bill Pulte.
The April 10 letter offered several suggestions for fulfilling President Trump’s executive order on promoting access to mortgage credit. Among them was using FHLB letters of credit to reduce the time and “operational frictions” arising from a financial institution needing to shift its primary source of secured funding from an FHLB to a Fed bank.
“Under this structure, the FHLBank letter of credit would be fully secured by collateral already pledged by the member to the FHLBank, but the Federal Reserve Bank would obtain an irrevocable repayment obligation from the issuing FHLBank, enabling the member to borrow promptly at the discount window while the underlying collateral transfer processes are being prepared, if necessary,” the council said.
“This tool is designed to serve as a bridge mechanism during periods of stress, including weekends and off-hours, when timing and valuation challenges are most acute,” it explained.
