Another bank subsidy America should kill off

livemint.com:

the failure of Silicon Valley Bank (SVB), New York Community Bank has lost about half of its value since it announced on January 31st that it was setting aside $552m to cover troubled loans secured against commercial real estate. Last spring the bank was a saviour of sorts, buying $38bn of assets from Signature Bank, which failed around the same time as SVB. Now it is the first example of a new set of problems facing the industry.

The good news is that commercial real estate is a smaller problem for banks than the losses on securities which brought down SVB and others. Lenders are protected by low loan-to-value ratios and not all commercial buildings are in trouble: it is rent-stabilised buildings and old, energy-inefficient office blocks that are suffering big write-downs. Banks that struggle will be those that are unusually exposed, or for which these losses are the last straw.

Yet the new problems cast light on a deeper, structural problem with America’s financial sector: the role of the 11 Federal Home Loan Banks (FHLBs), a network of privately owned but government-sponsored lenders to banks. Many banks fund commercial real-estate investments with FHLB loans; as interest rates have risen and the financial system has wobbled, the FHLBs’ role has further grown in importance. New York Community Bank has long relied on loans from FHLBs and as of December 31st they funded nearly 20% of its $116bn balance-sheet.

The government started the FHLBs in the 1930s with the goal of promoting homeownership by lending against housing assets. With the government’s encouragement, the system has since turned into something resembling a central bank, providing vast liquidity to the financial system during moments of stress. In the