JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) all witnessed a surge in secured loans, known as advances, to their members to promote housing finance, according to a recent report from the Federal Housing Finance Agency – Office of Inspector General.

After peaking at roughly $1 trillion in 2007, advances declined 62% to $381 billion by March 2012.

But that trend quickly changed, with advances growing to nearly $500 billion primarily due to advances to the four largest members of the system, JPMorgan, Bank of America, Citigroup and Wells Fargo. In the last year, home loan advances to the Too-big-to-fails surged 158% — and the Inspector General is looking into the risks.

The most likely cause is the banks need the advances to met bank liquidity standards established by the international Basel Committee on Bank Supervision in December 2010.

The Basel standards made the banks increase their holdings of high quality liquid assets (tier-1) to improve their ability to withstand a financial meltdown.

The most immediate conflict indicated by the results is that big banks are using funds meant to promote housing finance and redirecting the money to support international banking requirements.

"New Basel III regs now require 5% capital ratios for mortgage lending, a requirement that is largely punitive," Tom Showalter, chief analytics officer at Digital Risk told HousingWire.

This creates a concern about the relatively high level of system investments in “non-core” housing mission assets, such as mortgage-backed securities issued by Fannie Mae and Freddie Mac. The Federal Housing Finance Agency oversees both the governmentsponsored enterprises and the FHLBanks, something not lost on the Inspector General.

FHFA officials said that the surge in advances to large members and the associated safety and soundness risks were a priority during the 2013 annual examination cycle and will remain so in 2014, the report states.

“The risks include the significant losses an FHLBank could incur if a large member defaults on its advances, particularly if the advances were improperly collateralized or the value of the collateral had declined significantly,” the report said. 

Due to the surge, the FHFA-OIG said the FHFA should publicly report on FHLBank advances to large and other members in 2014, emphasizing the consistency of such advances with the safety and soundness of the System, as well as its housing mission.

"We recommend that FHFA publicly report on FHLBank advances to large and other members in 2014, emphasizing the consistency of such advances with the safety and soundness of the System, as well as its housing mission," the IG concluded. "FHFA agreed with this recommendation."