FHLBs Propose Allowing Letters of Credit for Fed Discount Window Advances
Summary
The Council of Federal Home Loan Banks sent a letter to FHFA Director Bill Pulte on April 10, 2026, proposing that FHLB members be allowed to use short-term FHLB letters of credit to secure advances through the Federal Reserve's discount window. The proposal would allow institutions to borrow promptly at the discount window while underlying collateral transfer processes are being prepared. The council described this as a bridge mechanism designed for periods of stress, including weekends and off-hours, when timing and valuation challenges are most acute.
What changed
The Council of Federal Home Loan Banks submitted a letter to FHFA Director containing suggestions for fulfilling President Trump's executive order on promoting access to mortgage credit. The key proposal would allow FHLB members to use short-term FHLB-issued letters of credit as collateral for Federal Reserve discount window advances, rather than requiring the member to directly pledge collateral to the Fed. Under this structure, the Fed would obtain an irrevocable repayment obligation from the issuing FHLBank, with the FHLBank letter of credit fully secured by collateral already pledged by the member.
For affected financial institutions, this proposal could streamline access to the Federal Reserve's discount window during periods of liquidity stress. FHLB members facing funding transitions could use this bridge mechanism to obtain prompt borrowing access without waiting for collateral transfer processes to complete, particularly during weekends or off-hours when operational challenges are most significant.
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April 17, 2026 Reading Time: 1 min read 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.
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