The Senate Banking Committee is expected to vote on a measure to restructure the Federal Home Loan Bank System when it takes up financial reform legislation Sept. 3.
But even if the panel can reach agreement on the highly contentious financial reform bill, the Home Loan bank provisions are likely to provoke a fight.
At the behest of the Treasury Department, the committee's ranking Democrat Sen. Paul Sarbanes is opposing plans to revamp the system. He is pressing lawmakers to add restrictions on the 12 Home Loan banks' securities investments, which have grown dramatically in the past 10 years.
Though the Home Loan Bank System was created to advance funds for mortgage lending, the banks' securities investments now total $149 billion, or 41% of the system's $359 billion asset total. In 1988 securities investments were only 14% of assets, or $17 billion.
None of the system's critics argue that the investments are too risky. The securities are all super-safe mortgage-backed paper and money market funds consisting of federal funds and commercial paper.
But administration officials and some lawmakers complain that the banks are too focused on making money.
"Hundreds of billions are being invested in income-producing assets that aren't directly related to the system's housing mission," said Treasury Under Secretary John D. Hawke Jr.
The banks argue, however, that the investments are needed to supply an adequate return to their bank and thrift member stockholders. "The banks' stock doesn't appreciate, so we have to pay enough to retain members," said John L. von Seggern, executive director of the Council of Federal Home Loan Banks. The banks' annual dividends now range between 6.5% and 8% of members' capital.
Bruce Morrison, chairman of the Federal Housing Finance Board, supports the restructuring proposals now before the Senate Banking Committee, which would reduce the amount of capital banks and thrifts must pay to join the system. Until the cost of membership declines, he said, large securities investments are needed to maintain dividends.
"An adequate dividend is the ingredient of a successful system," Mr. Morrison said. "As long as the capital system is inflexible, the banks will have to rely on investments."
The measure, sponsored by Sen. Chuck Hagel, R-Neb., also would make membership voluntary for thrifts and permit the banks to make more advances for economic development and small-business loans.
The growth in securities investments began when Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which required the banks to pay $300 million a year to help service bonds that had financed a thrift industry bailout. The law also forced the banks to contribute $100 million annually to the government's Affordable Housing Program.
With the banks facing a steady loss of members in the wake of the thrift crisis, the finance board has twice raised limits on how much the banks could invest in securities.
Pressure increased as more commercial banks joined the system in the early 1990s. The influx of capital required from these new members dramatically increased the amounts the Home Loan banks had to put to work, either through advances or securities investments. From 1992 to 1997, the banks' capital almost doubled, to $19 billion.
The banks say, however, that as the dollar total of investments has grown steadily, securities as a percentage of total assets have continued to drop-from a high of 50% in 1992.
"Our investments are going down, and advances are going up," said Mr. von Seggern.