“More oversight over how they’re spending that money, and questioning it, is very important,” Sen. Catherine Cortez Masto (D-Nev.), a Banking Committee member who has introduced legislation that would require the Home Loan Banks to double their affordable housing commitments, said in an interview.

“They are a taxpayer-subsidized system, even though some of them try to claim they are not -- they are,” said Cortez Masto, noting that the country is facing a massive shortage of affordable housing that the FHLB system was designed to address. “They get access to benefits that no other private bank gets access to.”

Those benefits include exemption from taxes, an emergency credit line to the Treasury Department and an implicit government guarantee should they run into trouble. Their advances to their roughly 6,800 members, which include commercial banks and insurers, also have first-lien status — meaning they are repaid ahead of even the FDIC, the deposit insurer that took losses after the recent bank failures.

Critics of the FHLBs say the loans to crypto-exposed banks are just the latest example of a government-backed lender playing fast and loose with financial risk while counting on taxpayers to pay the bill. Fannie Mae and Freddie Mac — the giant companies behind half of the country’s residential mortgages — lowered their standards for loan guarantees to subprime borrowers in the years leading up to the financial crisis, prompting the government to seize them at taxpayers’ expense in September 2008 to stave off catastrophic losses.

The Home Loan Banks are “taking risks secure in the knowledge that another federal agency will pick up the tab, and the [Federal Housing Finance Agency] should not allow that kind of arbitrage at the FDIC’s expense,” said Karen Petrou, managing partner at Federal Financial Analytics.

The Council of Federal Home Loan Banks, the FHLBs’ representative in Washington, pointed out that the lenders do not receive congressional appropriations.

“FHLBanks are privately capitalized, cooperatively organized financial institutions,” Council President and CEO Ryan Donovan said in a statement. “Congress established us to provide public good through the execution of our liquidity and affordable housing mission and has set up legal structures to facilitate our work.”

He said the Home Loan Banks loaned the money to help out the lenders before they failed.

The last month proves “that the Home Loan Bank System is operating exactly like Congress intended it to operate, and that we are there for our members during a time of distress,” he said.

The Federal Home Loan Bank System was created in 1932 to support mortgage lending and community investment during the Great Depression. The 11 regional FHLBs are government-chartered cooperatives owned by their members — financial institutions including thrifts, commercial banks, credit unions and certified community development financial institutions. They provide short- and long-term advances, or loans, to those members to ensure the institutions can continue lending. A bank must have at least 10 percent of its assets in residential mortgage loans to become a member.

The advances to the failed banks — which made mortgage loans but were heavily exposed to volatile crypto markets — have brought a harsher spotlight on the FHLBs just as the system is undergoing its first regulatory review in 90 years. Critics have suggested that access to the FHLB advances led to an increased appetite for risk at the wobbly banks.

Their regulator, the FHFA, launched the review last year to determine whether the FHLBs are meeting their affordable housing mission, among other questions. FHFA Director Sandra Thompson is expected to report recommendations from the review to Congress in the coming months. The last time lawmakers made significant changes to the FHLB System was in a 1989 bill passed after the savings and loan crisis.

Cortez Masto and Rep. Ritchie Torres (D-N.Y.), who sponsored a companion bill to overhaul the Federal Home Loan Bank System, recently sent a letter to the regulator recommending reforms it should make to “strengthen the community support requirements” for the FHLB’s members.

“Members benefit from the ability to take advances,” the Democrats wrote in the letter obtained by POLITICO. “In order to retain that benefit, the FHFA should require members regularly meet minimum levels of support for affordable housing and economic development activity.”

The FHFA should also “expand required housing investments…[and] consider if the community support standards should be made more robust and tied to receipt of advances,” Cortez Masto and Torres wrote.

Brown, the Ohio Democrat who heads Senate Banking and has made affordable housing a top issue, said his committee is probing the FHLBs’ ties to the collapsed banks.

“We’re looking into every angle of the SVB, Signature, and Silvergate failures, including their involvement with the Federal Home Loan Bank System,” he said. “My job is oversight, and I will keep pressing our regulators to ensure our banking system is safe and sound, and that Americans don’t have to pay for executives’ mismanagement.”

Silicon Valley Bank had $15 billion in outstanding loans from the San Francisco FHLB as of Dec. 31, 2022, and Silvergate owed $4.3 billion to the same bank. Signature had $11.3 billion in outstanding loans from the New York FHLB.

Lawmakers were by then already raising questions about the risks that banks’ crypto ties posed to the financial system after a string of crypto companies declared bankruptcy. Sen. Elizabeth Warren (D-Mass.) mentioned Silvergate and Signature Bank by name in a Dec. 7 letter to Federal Reserve Chair Jerome Powell warning that “banks’ relationships with crypto firms raise questions about the safety and soundness of our banking system.”

The San Francisco FHLB has already recovered its loans, and the advances to Signature “are expected to be repaid with no credit loss to the FHLBank of New York,” according to the FHLBs’ 2022 combined financial report, released March 24.

“If you tell a lender there will be no consequences for a bad loan, then they’ll lend very liberally,” said Con Hurley, an adjunct professor at Boston University and the former director of the Boston FHLB. “The losses are borne by the FDIC, and that’s where the moral hazard comes in. There’s absolutely no incentive for the Federal Home Loan Bank of San Francisco to do diligent underwriting – they win either way, whether the loan pays off or is taken over by the FDIC.”

Donovan sees the recent events differently.

“There has been a renewed appreciation both on Capitol Hill and also at FHFA for the importance of our liquidity mission,” he said.