The Federal Home Loan Bank (FHLB) System is a government-sponsored enterprise consisting of twelve cooperatively owned institutions that are regulated by the Federal Housing Finance Board. Shares in the individual FHLBs are owned exclusively by banks, savings institutions, credit unions, and insurance companies. Like Fannie Mae and Freddie Mac, FHLB debt is not explicitly guaranteed by the federal government, but FHLBs are able to borrow at better than AAA rates because of their government charters and the market perception that they are performing a government mission and will not be allowed to fail.

In 1998, the Federal Housing Finance Board authorized the FHLBs to enhance the credit of a broader range of state and local revenue bonds by issuing letters of credit in support of these instruments. Although the use of this authorization has been held up by a tax issue, it has also raised the question of competition between the FHLBs and private financial guarantee companies. The FHLBs argue that they will credit-enhance only the bonds of underserved localities, and the interest costs thus saved will enable these localities to build and operate schools, provide long-term care for the elderly, and make other necessary infrastructure improvements. Private financial guarantee companies, however, currently credit-enhance state and local revenue bonds, and argue that there is no need for the FHLBs to enter this market. Participants at this conference will examine the arguments on each side in this debate.