Over the past two years as policymakers debated and then passed legislation to reshape our nation's financial regulatory structure, a lot of attention has been given to large financial institutions. Now, as regulators begin the task of implementing the new rules and policymakers engage in fresh debates about how to rebuild our economy, it's important that the focus captures a different set of financial institutions — the community lenders that finance housing, small businesses, jobs, infrastructure and economic growth in the communities they serve.
For almost 80 years, these institutions have relied on a unique support structure that functions as a cooperative called the Federal Home Loan Bank System. It's where almost 8,000 banks, savings and loans, credit unions and insurance companies receive the liquidity they need to provide the flow of credit to their local economies.
I know firsthand the importance of the system because my community bank — Southside Bank in Tyler, Texas, is a member of one of the 12 Home Loan banks. Simply put, the system allows my bank to support lending within our communities.
Unfortunately, there is a proposal under consideration that would limit or eliminate membership in the Home Loan banks for some current members. In a request for comment, the Federal Housing Finance Agency (the Home Loan banks' regulator) expressed its desire to review current Home Loan bank membership requirements. If the proposal holds, it could remove a critical source of liquidity throughout the U.S.
Within the regulator's proposal, Home Loan bank member institutions could be required to hold at least 10% of their assets in mortgages. In periods when mortgage valuations rapidly decline, as we recently experienced, members could not be assured of maintaining at least 10% of their assets in mortgages. Also, a member's asset mix could change because of its strategy or the needs of local customers.
Further contained in the proposal are objective and quantifiable standards for the requirements that each member "makes long-term home mortgage loans" and "have a home financing policy." These requirements may sound reasonable on their face, but the consequences of implementation could have a serious impact on the sustainability of community lenders.
I would be remiss if I did not mention that many community lenders are still trying to understand the practical implications of the Dodd-Frank Act and, particularly, working to implement new rules governing risk retention and qualified residential mortgages.
Furthermore, policymakers are beginning in earnest to debate the very future of the housing finance system, including proposals that contemplate significant changes to the role of government in the housing market. In this uncertain economic and regulatory environment, the Home Loan banks continue to serve as a much-needed mechanism for economic stability.
We just experienced the most serious financial crisis since the Great Depression. During the heart of the crisis, 2007 to mid-2009, liquidity dried up virtually overnight and financial institutions quickly learned that one of the few, if not only, reliable sources of liquidity was the Home Loan banks.
During this time, the Home Loan banks provided hundreds of billions of dollars in critically needed liquidity to member financial institutions across the country. The self-capitalizing business model of the Home Loan banks provided the capital to fund this extraordinary level of growth. Through the worst of the crisis, the Home Loan banks played a very critical role in providing liquidity to thousands of community lenders, allowing them to keep their doors open and credit flowing.
Regulators and policymakers need to champion rules, principles and policies that strengthen the support system for community financial institutions. Limiting liquidity to financial institutions in a time of financial crisis should not be a part of this discussion. If ever another financial crisis hits, then homebuyers, small businesses, local economies and future generations across the country will be better served by a robust, accessible Federal Home Loan Bank System.
