Placing borrowing limits on Federal Home Loan Banks would stifle small banks that rely on the system to provide liquidity at a lower cost, according to one regional FHLB head. Lee Gibson, chairman of the Federal Home Loan Bank of Dallas, testified to the House Financial Services Committee Wednesday to defend FHLBs and the system’s use of advances to fund originations and existing mortgage portfolios. The system includes 8,000 member banks that work directly with FHLBs to extend loans to rural areas and local communities. Bank leaders in the segment testified in front of Congress to foster support for the dozen FHLBs nationwide as the federal government is considering a complete re-haul of the housing finance system. ““The Federal Home Loan Bank System is critical to the day-to-day functioning of many community banks across the country, and plays a pivotal role in providing funding to improve low-and-moderate-income communities,” testified Anthony Costa, CEO of Empire State Bank and a representative of the American Bankers Association. “The FHLBanks have a track record of success even in the face of extreme challenges,” Costa said. When the credit crisis took hold, lending among banks in the form of commercial paper dried up. Financial firms then turned to FHLB advances due to the lack of the traditional overnight CP funding. The amount of money provided by FHLBs jumped from $650 billion to more than $1 trillion, according to estimates from the ABA. Gibson says the banks extended $177 billion in advances to their 10 largest members in 2010. These members hold $2.5 trillion in mortgage assets and represent 68% of all residential mortgage originations in 2010, he said. Timothy Zimmerman, spokesman for the Independent Community Bankers Association, said without FHLBs, agricultural banks will struggle to obtain loans. “The FHLBs serve a vital role and must remain a strong, stable and reliable source of funding for community banks,” Zimmerman told the House committee. Zimmerman said the FHLBs value was apparent in the recent financial crisis when the banks continued lending even as other sources of liquidity dried up. Write to Kerri Panchuk.