Debate over the Federal Home Loan Bank System is expected to reach a boiling point next year as the system's regulator and the Treasury Department advocate different blueprints for reform.
Created in 1932 to supply thrifts with a steady source of mortgage funding, the system today is the world's largest issuer of short-term debt and earns hundreds of millions of dollars annually by investing in securities rather than promoting housing.
Bruce Morrison, chairman of the Federal Housing Finance Board, which regulates the 12 Home Loan banks, said the system should be expanded so it serves as a central bank for community banks and provides targeted economic development financing.
The system's capital structure also must be overhauled, he said. A stock system based on risk, rather than assets, would be safer and sounder, he said.
This new structure also would let the system reduce its securities investments, he said. The asset-based system has left Home Loan banks with more capital than they need, forcing the institutions to invest in securities to ensure members earn a satisfactory return.
Another way to shrink the dependence on investments is to alter how the system pays for part of the government's 1989 bailout of the thrift industry, he said. Rather than contributing $300 million a year to pay off bailout bonds, the government should base the contribution on a percentage of member bank earnings, he said.
The Home Loan banks also should be allowed to pay better returns on stock to members that commit to remain in the system for several years at a time.
That would reward banks and thrifts that ensure the system's stability by agreeing not to withdraw their funds at short notice, he said.
Participation should be voluntary for all banks and thrifts, he said. Currently, the government requires thrifts to be members.
Mr. Morrison also wants measures that would allow smaller banks, those with less than $500 million of assets to borrow from the system using collateral that is less stringently tied to housing assets, such as rural and agricultural loans.
On the opposite side of the debate, Treasury advocates returning the Home Loan bank system to its original function of supporting home mortgage lending.
Richard S. Carnell, Treasury's assistant secretary for financial institutions, advocates limiting a Home Loan bank's investment portfolio to capital plus member deposits. Such a move would slash the portfolio from $150 billion to $45 billion.
He also supports making it tougher for Home Loan bank members to cash in their stock, but opposes Mr. Morrison's preferred stock plan.
Instead, he would make it more expensive to withdraw from the system on short notice. This would lessen the possibility that outside investors would ever want to own shares in the Home Loan banks.
He also would prevent the Home Loan bank system from expanding its mission unless it could show that the market was not already serving that specific need.
Regardless of the plan, Congress appears certain to tackle the issue next year.
"We're going to be in play," said J. Patrick Cave, assistant vice president of the Council of Federal Home Loan Banks, a trade group representing 10 of the 12 member banks.
"And we're going to be in play whether it's HR 10 (financial reform) or whether Sen. Chuck Hagel (R-Neb.) and Rep. Richard H. Baker (R-La.) put it in as a stand alone bill."
But others think that Home Loan bank reform must be tied to the financial reform bill. "I think the chances (of reform) are good," said Mr. Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America.
"All the blocks are really in place, but in the context of a broader financial package."
Still, no one is willing to guarantee that reform will happen.
Efforts to change the system last year failed and the impeachment and crisis in the House Republican leadership have some questioning whether Congress will enact any legislation next year.
