Re: "Viewpoint: Harness Home Loan Banks for Job Creation" Nov. 10
Cornelius Hurley rightfully makes the point that the Federal Home Loan Bank System is a $1 trillion enterprise whose business model is tried, true and profitable. I concur with Mr. Hurley that the Federal Home Loan Bank System played a critical role in providing liquidity during the financial crisis. I also agree with Mr. Hurley that more can and should be done to spur job creation and economic recovery.
I cannot, however, agree with the approach Mr. Hurley proposes to restructure the Home Loan Bank System, expanding its mandate in a way that would fundamentally change the banks' business model. This redirection of the system's mission would put the entire system at risk — making it far less likely to be able to respond as needed both on an day-to-day basis, and in any future financial crisis.
The fact that the Federal Home Loan banks' cooperative structure and advance model business has worked so well has inspired any number of proposals to use the banks to achieve other important goals. One would have renamed the banks "Enterprise Resource Banks" and refocused their mission on job creation and community development. More recently some have again called for the banks to refocus their mission on business and job creation. While these are worthy goals, they should not be done at the expense of the mission the banks serve so well today.
It is important to remember that the member banks that cooperatively own the system can use advances to fund loans of any kind — small business, agriculture, commercial development, mortgage, and more. Advance money is fungible. As long as members have sufficient and appropriate collateral to get advances, the system works. Members have flexibility to meet loan demand and accountability to ensure that they have sufficient collateral to repay the advances. Lack of liquidity is not what is preventing business loans from being made; rather it is that some business borrowers simply do not have the credit rating and capacity to repay a loan in today's market.
Opening up the system to nontraditional lenders and mandating support for a segment of the market without regard to the safety and soundness of the system would put the cooperative structure of the system at risk and reduce the flexibility the system offers to members to fund the types of loans they and their customers choose and can afford. It would also repeat the mistakes made with the other government-sponsored enterprises that were required to "lead the market" toward more and more lending with limited underwriting and lower or no down payments. That result was catastrophic.
The banking industry, and indeed the entire financial system, was fortunate that the Federal Home Loan banks were in place during the recent crisis or things could have been far worse. The system worked because it stuck to its mission.
Anthony P. Costa, Chairman
Empire State Bank
Chairman, Federal Home Loan Banks Committee, American Bankers Association