What is the Federal Financing Bank?

John Lister

The Federal Financing Bank is a government corporation in the United States. Its role is to act as a central resource for funding government agency borrowing. The aim is to reduce the need for agencies to deal directly with the commercial lending market, where an individual agency would have limited negotiating power.

The Federal Financing Bank is considered part of the U.S. Treasury Department.
The Federal Financing Bank is considered part of the U.S. Treasury Department.

Congress created and authorized the Federal Financing Bank in 1973. The bank operates as a corporation, but is considered part of the Treasury Department. It is supervised by the Secretary of the Treasury. The money that the bank collects and passes onto agencies comes from the Treasury, which in turn raises the cash through the sale of treasury securities.

The main purpose of the bank is arranging loans and other financing for government agencies. As of August 2010, this borrowing totaled $54.3 billion. To give some idea of the scale of the work the bank carries out, during August 2010 it arranged 110 loans to 66 agencies. This included the US Postal Service, universities, and rural utilities agencies. It also included several motor companies for whom the loans had been guaranteed by the government.

A secondary aim of the Federal Financing Bank is to deal with the potential problem of debt-based securities products such as bonds being released by government agencies above and beyond what has been budgeted for. This has the potential to produce an over-supply of such bonds, which are particularly attractive to many investors, as it is virtually guaranteed that the issuer will repay the money when the bond becomes due. In turn, this over-supply could drive down the price of Treasury securities, which could severely impact either the amount of money the central federal government was able to borrow, or the interest it would have to pay. To deal with this, the Federal Financing Bank has the authority to buy up any federal agency's securities in an attempt to stabilize the price.

In 2008, some lenders previously involved in student loans stopped lending to students. This was largely due to the wider contraction in the credit market. This prompted some calls for the Federal Financing Bank to lend money to the lenders, making it easier for them to provide student loans. President George W. Bush objected to the idea, and the situation reawakened debate over the bank's role.

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