Over the past five years, New York’s Ponce Bank has doubled its deposit base, an increase of more than a billion dollars. But its loan portfolio has grown even more.

Founded in 1960, Ponce Bank is the only Hispanic-led community bank in New York, and one of only two remaining banks headquartered in the Bronx. As a federally-certified community development financial institution, Ponce serves clients who aren’t well served by much larger mainstream banks.

Ponce’s balance sheet today includes $2.5 billion in loans and $2 billion in deposits. In order to make up for the difference, Ponce has a number of tools at its disposal, but none more important than the Federal Home Loan Bank system, a network of 11 regional, cooperatively-owned, government-sponsored, wholesale financial institutions. They’re bankers’ banks.

By borrowing from its regional Federal Home Loan Bank of New York, Ponce can continue meeting its community’s credit needs while the bank’s deposit base — largely middle-aged blue-collar workers and a growing number of recently-immigrated lower-skilled laborers — catches up over time.

Read more: Ponce Bank and the Curious Case of Mutual Banks

“If you start passing up on loan applications, it has repercussions, and sometimes they’re very long term repercussions,” says Carlos Naudon, CEO at Ponce Bank. “You don’t want to say to customers, yeah, you have a great quality loan application, but we don’t have the funding for it.”

Some believe the Federal Home Loan Banks can and should do even more to support housing, economic and community development across the country. Others have been pushing to create new, more localized and specialized wholesale banks that would partner with local lenders to fill in other gaps that remain in access to capital.

In a world of uphill battles, reforming or creating new wholesale banks is a steeper climb than most. When they work, wholesale banks remain deep behind the scenes, quietly supporting community-facing lenders like Ponce. They’re not sexy, and they rarely generate headlines unless things go sideways, but wholesale banks wield great influence over who does and doesn’t get access to credit and, in turn, how communities and cities are made and remade.

But there may soon be a new path forward. For years, as a member of the state assembly, Zohran Mamdani co-sponsored the New York Public Banking Act, which would allow local governments across New York to create new city-owned wholesale banks. With Mamdani now settling in as New York City’s new mayor and renewed interest in wholesale banks, it’s worth taking a closer look at whether existing wholesale banking systems can be reformed — and whether state or local governments should build new ones of their own.

Institutions vs. Incentives et al.

Most support for community development and housing today comes in the form of tax incentives, loan guarantees, soft debt or direct spending in the form of grants or rental assistance. The Federal Home Loan Bank system is a remnant of an era when policymakers also created independent institutions to address shortcomings in the economy.

Some of the other institutions that policymakers created long ago are much more well-known today, like the Federal Reserve, the Federal Deposit Insurance Corporation, or the Federal National Mortgage Association (better known as Fannie Mae).

Each independent institution has its own unique funding model that doesn’t depend on budget appropriations from Congress or the whims of taxpayers seeking to minimize their obligations. Day-to-day decisions are made by financial professionals within each institution, rather than elected officials or political appointees. Financial and operational independence gives them stability and reliability to support and influence thousands of private financial institutions, shaping the nation’s banking and housing markets.

In the midst of the Great Depression, thousands of local savings & loan associations across the country found themselves caught between a rock and a hard place. There was a surge in demand for home financing, but the tough economy limited deposits on hand to fund new loans. With the passage of the Federal Home Loan Bank Act of 1932, Congress created the Federal Home Loan Bank system to provide a source of funding for those local lenders beyond what they could raise locally from depositors.

The Federal Home Loan Banks receive virtually all of their income from the interest payments on the loans they make to their members. They receive no annual funding from Congress, although they are themselves tax-exempt. To raise funds for making loans to other lenders, the Federal Home Loan Banks sell bonds to investors on global capital markets, where their status as government-sponsored enterprises gives them access to some of the lowest interest rates anyone can get.

According to one recent study, the Federal Home Loan Banks help maintain local competition among lenders, lowering the cost of borrowing while increasing nationwide mortgage volume by as much as $50 billion a year, all without increasing risk to the financial system overall.

Peace of mind

As independent, wholesale financial institutions, the Federal Home Loan Banks give local lenders something no grant program nor tax break can give them — an ongoing, reliable, flexible, dedicated source of funding they can call upon at a moment’s notice as part of their normal day-to-day operations to manage their balance sheets.

Running a community bank can be like walking a tightrope. Deposits come in and out, borrowers are taking out new loans and repaying others. As chief financial officer at Ponce Bank, Sergio Vaccaro is the one holding the balance pole, constantly checking the bank’s balance sheet throughout the day to make sure its deposits and other liabilities equal its loans and other assets.

Deposits are the cheapest source of funding for any financial institution. Vaccaro always wants to see more. Depositors often turn into borrowers eventually, which is really what matters to the bank’s bottom line. That’s why Ponce has invested a lot recently to grow its deposit base — improving its online and mobile offerings, hiring deposit relationship officers for the first time, and investing in new marketing strategies. But going after deposits is a tough slog involving a bit of uncertainty in an ever-more competitive financial landscape.

“With a deposit, it’s an effort,” Vaccaro says. “Are we going to get it? Is it stable? Does it go? Does it stay?”

As a backup during growth periods like Ponce has been through these past five years, nothing can replace the convenience and reliability of Federal Home Loan Bank borrowing.

It’s not unlimited: Each lender can only borrow an amount up to 30% of its total assets from its Federal Home Loan Bank. But since the cap is a percentage, it means the dollar amount available goes up as the bank grows. It’s enough to give Vaccaro peace of mind that the Federal Home Loan Bank of New York is always on standby to provide exactly what Ponce might need, from an overnight advance all the way up to a 30-year advance.

“I know exactly what I have to pay, and I know exactly what the tenor is, and I know that I have access to it,” Vaccaro says. “With [the Federal Home Loan Bank of New York], I can borrow $270, $280 million tomorrow if I want to…It’s absolutely critical, and it will continue to be critical. If they go away tomorrow, I have no other way. How do I replace $521 million of borrowing?”

Credit where credit is due

Over the decades, much has changed about the banking system. After the 1980s Savings & Loan Crisis, all those local savings and loan associations have either shut down or folded into the same system as much larger commercial banks. Ponce Bank is one of the survivors, originally known as Ponce de Leon Federal Savings and Loan Association.

Decades of policy-enabled consolidation in banking means there are more than 10,000 fewer local lenders today than there were in 1985.

The Federal Home Loan Banks only survived thanks to Congress passing legislation to evolve and expand their membership. Today the Federal Home Loan Bank system’s 6,400 members include more than 4,000 banks, 1,645 credit unions, 609 insurance companies, and 83 federally-certified community development financial institution loan funds. In a typical year, the 11 Federal Home Loan Banks collectively make between $400 to $500 billion in loans, known as advances, to their members.

But as a result of all these changes to the banking system, most of those advances now go to large banks. From 2015-2025, 74% of Federal Home Loan Bank lending went to institutions with more than $10 billion in assets, according to a recent report from the U.S. Government Accountability Office. As of September 2025, the top 10 current borrowers from the Federal Home Loan Bank system include seven of the 10 largest banks in the country.

And yet, the same GAO report also found that 97% of institutions that borrow from the Federal Home Loan Banks have less than $10 billion in assets. Out of that 97%, the more an institution borrowed from its regional Federal Home Loan Bank, the more residential and commercial mortgages it made and the faster it grew overall. The study found no such effect of Federal Home Loan Bank borrowing on mortgage lending by institutions with $10 billion or more in assets.

In other words, even though most Federal Home Loan Bank lending today goes to large banks, the wholesale financing they provide still makes a positive difference for communities — but only when it goes through smaller local and regional lenders, which is what the system was originally created to do.

Former savings & loan associations like Ponce, also known as “thrifts,” accounted for 13% of Federal Home Loan Bank advances in 2024.

Fixing the Federal Home Loan Banks

The Federal Home Loan Banks have drawn growing criticism over the past few years.

It starts with scrutiny over how much of their lending now goes to large banks and other financial institutions that don’t use it to increase lending to communities. Private equity firms have found legal loopholes to access billions in cheap, flexible funding from the Federal Home Loan Banks. Apollo Global Management, one of the most prominent private equity fund managers, is currently one of the top 10 largest borrowers from the Federal Home Loan Bank system.

Meanwhile, smaller credit unions and federally-certified community development financial institutions have faced difficulty in accessing Federal Home Loan Bank advances even after becoming members.

“You cannot force your private bank members to care about affordable housing or community development,” says Joe Neri, who recently retired as CEO from the Chicago-based community development financial institution IFF. “They don’t have to give a shit about affordable housing. That’s why … this is great for Federal Home Loan Banks that [CDFIs are] members, because that’s all we do. That’s all we care to do. But the challenge is these Federal Home Loan Banks are so built to cater to those other folks that they don’t care about us and they make it very difficult for us to use them.”

Consumer advocates have also been railing against what they see as the system’s excessive spending on employee compensation and annual dividends to members.

Each of the 11 Federal Home Loan Banks is a cooperative owned by its member institutions. Members can run in annual elections for their regional bank’s board of directors and each member gets a vote in those elections. Members also get annual shares of each regional bank’s profits — and the Federal Home Loan Banks happen to be very profitable.

The Federal Home Loan Banks collectively made $6.3 billion in profits for 2024, according to the system’s annual financial report. More than half of that — $3.7 billion — went out as dividends to members.

Meanwhile, the Federal Home Loan Banks collectively spent $859 million in employee salaries and benefits in 2024, just slightly more than the $856 million they spent on internal affordable housing grant programs. In 1989, Congress passed legislation requiring each Federal Home Loan Bank to set aside at least 10% of its profits every year to fund an affordable housing program.

Since being elected to office in 2017, U.S. Sen. Catherine Cortez Masto, a Nevada Democrat, has been leading the charge in Congress to reform the Federal Home Loan Bank system. The latest version of her legislation would increase the required affordable housing program set aside for each regional bank to 30%. It would tie executive compensation to how well each regional bank is meeting their affordable housing and community development mission. The legislation would also make it easier for credit unions and community development financial institutions to access advances.

In 2022, the Biden administration launched a comprehensive review of the Federal Home Loan Banks, which included a series of listening sessions and regional roundtables to gather input and ideas. The Biden administration released the final report from those discussions in November 2023. There had been some progress on implementing the report’s recommendations, many of which deal with refocusing the system on its original affordable housing and community development mission, but that progress has stalled since the return of the Trump administration.

Getting cities into wholesale banking

When Linda Levy started out as the first full time manager at Lower East Side People’s Federal Credit Union back in 1986, there was only one other part-time employee. She eventually served as the credit union’s CEO from 2006 to 2019, and remains a board member today.

Founded in 1986, Lower East Side People’s still occupies the building that had previously housed what had been the last remaining bank branch on Manhattan’s Lower East Side. Big banks have since returned to the neighborhood, along with a wave of luxury housing development. But the Lower East Side is still a hub for limited-equity housing co-ops, apartment buildings reserved for low-income residents who originally acquired ownership of those buildings after they were abandoned by landlords in the 1970s and 1980s.

Chartered by some of those limited equity co-op residents, Lower East Side People’s remains one of the few credit unions anywhere that has experience working with housing co-ops.

“We started out by just lending to the co-op shareholders because that’s all we could afford,” Levy says. “And then we started lending to the buildings themselves, but even then we were still very restricted in terms of the size of the loan that we could make.”

As part of maintaining a safe and sound banking system, federal laws place limits on how much any bank or credit union can lend to any single borrower. Roughly speaking, the larger the bank or credit union, the higher its legal lending limit.

When Levy was CEO at Lower East Side People’s, the credit union’s limit typically hovered between $1-$2 million. Enough to cover some back taxes, or maybe a boiler replacement. Certainly nowhere near enough to acquire and rehab a whole apartment building or to build a new one. Not in today’s New York.

It doesn’t matter how sure the credit union is that a co-op would have the financial capacity to repay a $3 million or even a $30 million loan. It can’t make a loan beyond its legal limit. A larger lender may have the capacity to make that loan, but it might not be interested in lending in that neighborhood; or even if it is interested in the neighborhood it might not understand the co-op model enough to be comfortable making that loan. Not many lenders out there are familiar with co-ops.

Loan participations are an established way for lenders to work within legal lending limits. With a loan participation, after a lender originates a loan, one or more other lenders supply portions of the loan amount. As the borrower repays the original lender, the loan repayments are split up proportionally to all the lenders who participated in the loan. The borrower only has to deal with the loan originator, while the other lenders stay behind the scenes.

Some Federal Home Loan Banks do loan participations with their members, but not for housing co-op loans in New York. Lower East Side People’s isn’t even a member of the system. The credit union hasn’t found anyone else it can rely on to do loan participations with it on a regular basis. That’s why Levy has spent the past few years spearheading a campaign to create a public bank — a city-owned wholesale financial institution.

Loan participations would be a big part of how a public bank would work, as Levy envisions it. The Lower East Side People’s Federal Credit Union could underwrite that $30 million loan to a housing co-op, supply what it can within legal lending limits, and the public bank would provide the rest through a loan participation.

An analysis from The Center for New York City Affairs at The New School projects that over its first five years, a New York City public bank could lead to the creation of 70,600 jobs, the introduction of over 17,000 new or rehabilitated affordable housing units, and over $5.8 billion in new lending through loan participations with local credit unions and community banks.

Campaigns to create similar city-owned or state-owned wholesale banks have been popping up in other parts of New York State, as well as Massachusetts, Philadelphia, New Mexico, Colorado, all across California and elsewhere. All of these campaigns have been moving slowly, if at all.

It’s been so long since policymakers have seriously considered how wholesale financial institutions can help achieve whatever goals they have.

But newly-inaugurated New York City Mayor Mamdani supported public bank legislation while he was a state assembly member, and Levy is hopeful his time as mayor can bring new life to the effort. U.S. Representative Alexandria Ocasio-Cortez, a New York Democrat who spoke at Mamdani’s inauguration, has proposed federal legislation that would make it easier for local and state governments to create their own banks. Mamdani would also be joining Rochester Mayor Malik Evans, who has been vocally supportive of state legislation to create a city-/county-owned wholesale bank serving his locale.

From North Dakota to your city or state

Believe it or not, there’s one place in the entire country where such a public bank exists, and has for a very long time. It’s North Dakota, where the Bank of North Dakota has been around since 1919. It’s a state-owned wholesale bank, and it works primarily through loan participations. With a mission to support economic development across the state, the Bank of North Dakota participates with private lenders on loans for businesses of all sizes, commercial real estate, agriculture, housing, infrastructure and more.

Through loan participations, the Bank of North Dakota allows local lenders to do larger loans and also make more loans than they would without it. Each and every community bank or local credit union in North Dakota, no matter how small, can essentially act as if it has a $10 billion balance sheet, which is the size of the Bank of North Dakota’s balance sheet. With the Bank of North Dakota to back them up, community banks hold 79% of deposits in North Dakota — the highest percentage of any state.

Like the Federal Home Loan Banks, the Bank of North Dakota operates independently from policymakers. Elected officials play no role in the day-to-day operations of the bank, including loan participation approvals. Levy envisions it would be the same for a New York City or Rochester public bank.

The Bank of North Dakota is also financially self-sustaining, with interest from loan participations providing almost all its income. And it’s been consistently profitable, often returning a portion of its profits back to the state government.

Unlike the Federal Home Loan Banks, the Bank of North Dakota raises funds for its lending by holding all of the deposits for the state government of North Dakota, which is required by law to use its state-owned bank for all its primary banking services.

With some differences here and there, the Bank of North Dakota is the basic wholesale bank model proposed by public bank campaigns across the country, though none anticipate that new public banks would hold all of their state or municipal government deposits, at least not right away. But they do propose public banks would start out by opening accounts to hold at least some of the deposits currently sitting in state and local government bank accounts at Wall Street mega-banks.

“We’ve always thought of it as a wholesale bank,” Levy says. “It’s another big problem we have that public money is tied up in all of these large banks on Wall Street and not doing what we want them to do. A public bank would take out those same funds and reinvest into our communities.”

This post was originally published on Next City.