A Wish List for Home Loan Banks

System's Regulator Wants Changes from Congress

Despite abundant capital, a triple-A credit rating, and a unique loan product, the Federal Home Loan Bank System faces an uphill struggle.

More than 170 commercial banks have joined since Congress expanded the membership base in 1989, but they have not offset departures by failed thrifts. Lower loan volume is depressing earnings. The system must pay the Resolution Funding Corp. $300 million a year for S&L cleanups; that could consume dwindling profits. At least $50 million a year goes to a popular affordable housing program.

Congress could help in the wooing of commercial banks by fine-tuning membership and capital rules and revising the Resolution Funding Corp. contribution, the system's chief regulator, Chairman Daniel F. Evans Jr. of the Federal Housing Finance Board, told staff writer Debra Cope.

American Banker: What could make the Home Loan Bank system more attractive to commercial banks? Daniel Evans: The standards for admission and departure ought to be the same for commercial banks and S&Ls. Now they are substantially different, and that drives up the effective cost of borrowing for banks.

Two things will have to happen to boost loan demand from banks. The recession in the housing market will have to end and have been over for a while. And the stock purchase requirements for commercial banks, which are more onerous than for S&Ls, will have to be eased.

The banks that have joined are able to deal with the restrictions. It's among those that haven't yet joined that the difficulty arises.

AB: Are there more effective ways to deploy your capital? DE: The board over time could increase the leverage ratio on capital. Right now it's limited to 12 to 1. What the board can't do is waive the statutory capital requirements for members. You've got to buy 5% of each advance in the form of stock if you're an S&L, possibly more if you're a bank. So there's a 20-to-1 cap, and we can't change that. But we can change the 12 to 1, and we're looking at that.

The bank system is overcapitalized. Our members have to invest too much capital to realize the return that they're getting. The board is studying and will move on system capital issues in the very near future.

AB: Are the financial demands on the bank system too great? DE: As bank system income goes down, Refcorp and affordable housing will obviously consume a larger percentage. I would prefer to see the Refcorp contributions as a percentage [instead of a fixed amount]. If we're successful in leveling the playing field for S&Ls and banks and therefore getting more portfolio lenders borrowing from the system, a percentage formula might actually net more money.

AB: What if the bank system gets no legislative relief? DE: Refcorp and affordable housing will consume 39% of our net income by 1993 or 1994. If that's the case, our dividends could sink as low as 6% on average. We need to avoid the problem by planning for it now.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.