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Bank Intermediation Between Federal Home Loan Banks and the Fed

Article Quant Q&A · Author: bsky
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Summary

The document clarifies a video’s description of a financial intermediary in a transaction involving the Federal Reserve. In the accepted response, the intermediary is a commercial bank acting between a Federal Home Loan Bank and the Fed. The Home Loan Bank has funds it would like to place at the Fed but is not eligible to use the relevant deposit facility directly, so it places funds with a commercial bank, which then deposits them at the Fed.

The response distinguishes this arrangement from ordinary borrowing by banks: it says banks generally do not take unsecured loans from the Fed unless they are in crisis. A second answer instead describes the Fed buying government bonds and presents broad claims about bailouts, but it does not explain the intermediary in the video and includes speculative criteria. The clearest lesson is specific to access and deposit placement in the described arrangement; the document does not offer a full account of Fed lending, monetary policy, or all Federal Home Loan Bank transactions.

Key ideas

  • In the transaction described, a commercial bank intermediates between a Federal Home Loan Bank and the Fed.
  • The Home Loan Bank places funds with the commercial bank because it cannot use the Fed deposit facility directly.
  • The commercial bank then deposits those funds at the Fed.
  • The accepted response says banks generally do not borrow unsecured funds from the Fed outside crisis conditions.
  • The document’s second answer describes bond purchases but does not clarify the intermediary in the video.

Tags

Fixed incomeUS markets
Full text
# Does the FED lend directly to commercial&investment banks or is there an intermediary


# Does the FED lend directly to commercial&investment banks or is there an intermediary












I has looking at this video on how interest rates are set. When the process of borrowing from the FED to commercial banks is explained, another entity is described(around 00:40).

So when the FED lends to commercial&investment banks, is there some other player involved in the transactions?

Why is this other player necessary?

## Answer by dm63 (score 2, accepted)

https://quant.stackexchange.com/a/35430

This video is not explaining how banks borrow from the Fed. It is explaining the role of banks as an intermediary between the Fed and the Home Loan Banks. Thus, the Home Loan Banks have cash and would like to deposit it at the Fed, but they can't because they are not eligible for the Fed deposit facility. So they deposit it with a bank, which turns around and deposits it in the Fed.

FYI Banks don't generally take out unsecured loans from the Fed, unless they are in crisis mode.

## Answer by kris123456 (score 0)

https://quant.stackexchange.com/a/35382

I don't think, fed lends money to anyone. Government issues bonds and Fed buys these bonds.

As fed buys paper bonds from government, fed pays them in freshly printed dollars. Now government has the required number of dollars and goes on spending spree. when the government needs more cash, they issue more bonds, which are bought by Fed.

The case of bail outs are different. These are considered exception and under special privileges (If the failed company can bring down nations GDP by ~2% or more or if unemployment increases by 100K), then they bail out such huge corporations, which otherwise would cease to exist and impact the whole nation.

The numbers are for reference only. not sure of their internal considerations.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.