The Federal Home Loan Bank system is a cooperative, government-sponsored enterprise, created to provide liquidity to the nation's lenders with a special focus on low and moderate-income housing and community development, all under the supervision of the recently created Federal Housing Finance Agency. The Federal Home Loan Bank (FHLBank) essentially acts as a lender to lenders. The 12 regional banks engage in no direct lending to the public. Instead, member banks turn to the FHLBank for on-demand low interest loans which the member bank can then use to issue mortgages or other loans to the general public. The 12 regional banks that make up the FHLBank system, though unfamiliar to many, have been key players throughout the financial crisis and are likely to continue to play an important role in the ongoing economic recovery. Many of the FHLBanks, however, like so many other entities involved in providing or financing mortgages, are suffering serious financial stress as a result of the collapse of the housing market. With the regional FHLBanks suffering various degrees of financial difficulty, and a number reporting capital shortages, concerns have been raised as to the stability of the FHLBank system as well as the consequences of an FHLBank failure. Anxiety over a struggling FHLBank system may be warranted, as the banks as a whole are equal in size to failed mortgage giants Fannie Mae and Freddie Mac and just as interconnected with the national mortgage market. This report discusses the FHLBanks' creation, purpose, structure, and position within the overall financial system so as to clarify the functions of the FHLBank. The report then outlines the FHLBanks' current financial state and the statutory options for handling a potential failure. Until the Depression, mortgages were designed to be refinanced every five to 10 years. During the Depression, depositors withdrew their money from banks, leaving banks unable to fund replacement mortgages for the loans that came due. Unable to refinance, many homeowners had insufficient resources to pay off the mortgages and defaulted. The weak economy and previous defaults and foreclosures depressed home prices and exacerbated the problem. The Federal Home Loan Bank Act of 1932 created the Federal Home Loan Bank (FHLB) system to make loans, known as "advances," to member banks that lent the money as mortgages to homeowners. The banks pledged existing mortgages as collateral for the advances and to assure that the funds were used to finance housing. Mortgage lenders wishing access to advances had to join the system and were regulated for safety and soundness by the Federal Home Loan Bank Board. The FHLBank underwent significant reforms in 1989, 1999, and 2008. In 1989, the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) made major changes to the system in response to severe failures in the savings and loan industry. FHLBank system membership was opened to any depository institution engaging in significant mortgage lending. The new Federal Housing Finance Board replaced the Federal Home Loan Bank Board in regulating members. Each FHLBank had to set aside at least 10% of net earnings for low and moderate-income housing programs. The Federal Home Loan Bank System Modernization Act of 1999 expanded the membership and mission of the FHLBank system by dropping minimum mortgage asset requirements, and making voluntary membership available to a broader range of financial institutions. The mission of the FHLBanks was also expanded by allowing the banks to secure advances with assets other than housing loans such as agricultural and small business loans. In 2008, the Housing and Economic Recovery Act (HERA) instituted a new FHLBank system regulator in response to concerns that the FHLBank Board lacked sufficient powers and a desire to combine FHLBank system regulation with that for two other housing government-sponsored enterprises (GSE), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The new regulator, the Federal Housing Finance Agency (FHFA), was granted broad supervisory and regulatory powers, including the new authority to set risk-based capital requirements, liquidate an FHLBank, or act as either a conservator or a receiver of an FHLBank facing potential insolvency. HERA also made the FHFA Director a presidential appointee subject to Senate confirmation, who would serve a five year term and hold broad discretion over the regulation of the housing. Regulation of FHLBank members depends on the form of legal organization, such as a state charter or federal savings association, that the member has selected. Similar to the Federal Reserve System, the FHLBank system consists of 12 regional member-owned and federally chartered banks, each with its own individual board of directors. There are regional FHLBanks in Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, Seattle, and Topeka. The Office of Finance is jointly owned by the FHLBanks and coordinates the sale of debt securities, the system's chief means of raising funds. Each regional bank has its own independently operating 13-member board of directors. Although member banks are free to elect the directors, the majority of each board must be officers of member banks, and at least two-fifths of board members must be independent (non-member bank) directors. While each regional bank operates independently, all FHLBanks are responsible for the debts and obligations of the other banks. This relationship of joint and several liabilities adds reliability to FHLBank debt securities and is one reason why the banks are usually considered a single GSE rather than a collection of separate entities. All 12 of the regional banks are private cooperatives that are owned and operated by their individual member institutions. Membership in the FHLBank system is open to any federally regulated depository or financial institution that engages in "long-term" home mortgage lending. To gain membership status, the eligible institution must purchase stock in the regional FHLBank that serves the state in which the institution's home office or principal place of business is found. Once an institution has purchased stock in its regional bank, it then becomes a partial owner of the regional FHLBank and is eligible to receive benefits such as dividend payments and FHLBank advances. As of September 30, 2009, membership in the FHLBank system exceeded 8,000 institutions, with collective assets measuring more than $13 trillion. Commercial banks represent over 70% of the total FHLBank system membership. The fundamental characteristic that allows the FHLBanks to provide low interest loans to member institutions is their collective status as a "government-sponsored enterprise" (GSE). Often described as a public/private hybrid, a GSE is a quasi-governmental, privately owned and managed, but federally chartered, financial lending institution whose activities are limited to certain public purposes. For example, the three housing GSEs can only purchase mortgages that have already been originated and either borrowing funds to hold the mortgages or packaging the mortgages into mortgage-backed securities (MBS). These MBS can be either held by the GSEs or sold to investors. GSEs do not normally receive explicit government funding. In addition to the FHLBank system, the other GSEs are Fannie Mae, Freddie Mac, the Federal Agricultural Mortgage Corporation (Farmer Mac), and the Farm Credit System. Although a federally chartered organization generally receives increased governmental supervision and cannot bind the government in any way, Congressional sponsorship brings with it the authority to exercise specifically enumerated governmental powers and a number of significant financial benefits. For instance, the FHLBank system enjoys a variety of special privileges such as exemption from federal, state, and local income tax. Although Fannie Mae's and Freddie Mac's stock is traded on the New York Stock Exchange, only members can purchase stock in their FHLBank. FHLBank shares are purchased from and sold to the FHLBank that issued them. Perhaps the most important benefit enjoyed by the FHLBank, however, is the so-called implicit guarantee that the federal government backs FHLBank obligations. The value of this implicit guarantee is, however, ambiguous. On the one hand, all debt issued by the FHLBank system, Fannie Mae, and Freddie Mac must state that repayment is not guaranteed by the federal government. On the other hand, Congress has assisted GSEs that were in financial difficulty. For example, when Fannie Mae was losing significant amounts of money in 1982, Congress passed the Miscellaneous Revenue Act of 1982 that provided tax benefits for Fannie Mae. The Farm Credit System was aided with the Agricultural Credit Act of 1987, which authorized the issuance of $4 billion in bonds to support system members. Furthermore, Section 1117 of the Housing and Economic Recovery Act of 2008 (HERA) authorized the Secretary of the Treasury to purchase any amount of GSE securities—debt or equity—necessary to provide stability to financial markets, prevent disruptions in the availability of mortgage finance, and protect the taxpayer. This authority, which expired December 31, 2009, was used by the Secretary of the Treasury to enter into a contract with Fannie Mae and Freddie Mac to supply an unlimited amount of equity between 2010 and 2012. Because of this implicit federal guarantee on FHLBank debts, FHLBank securities are considered to have little to no risk and regional FHLBanks can borrow funds from investors at very low interest. The FHLBanks played an active role in efforts to stabilize the financial system throughout the financial crisis. As other sources of funding fell, financial institutions increasingly turned to the FHLBank as a source for capital both to help cover losses and to allow members to continue making mortgages. FHLBank advances to member banks likely prevented a number of financial institutions from collapsing, and delayed the failure of other institutions long enough to allow a merger or acquisition by a third party. One result of the FHLBanks' role in the financial crisis has been an increased concentration of advances.