For Banks Under Stress, There’s a Federal Backstop That Provides Help Without Stigma

The US banking panic that unfolded in March could’ve been a lot worse if it weren’t for the Federal Home Loan Bank system. These government-sponsored but privately funded institutions provided hundreds of billions of dollars to banks when depositors were pulling their cash.

The FHLBs played a role a little like that of the Federal Reserve, which also opened the taps for banks. The Fed is a lender of last resort: Its “discount window” is a place where banks go when they can’t get cash anywhere else. The less well-known FHLB system is more like a next-to-last stop. Borrowing from it can cost banks more than using the Fed, but it doesn’t come with the stigma of signaling an emergency.