WASHINGTON -- The Federal Home Loan Bank system is not a dinosaur, as some have charged, but it is taking on additional risks as it moves away from its traditional purpose of supporting home lending, the Congressional Budget Office concluded.
Some have questioned whether the bank system is still needed. The budget office said in a report released Friday that because a secondary market for home mortgages has been developed, thrifts no longer face the liquidity crunch they did when the system was created in 1932.
|Only Source, of Funds
However, the budget office noted that the bank system is practically the only source" depository institutions have for medium-term and long-term funds. By providing such loans to member thrifts and banks, the system helps them "manage their interest rate risks, which can reduce the costs of such risks to the deposit insurance funds," the budget office concluded.
"These activities arguably provide the strongest justification for the system's continued existence," it said.
Risks Seen as Well-Controlled
The bank system, which consists of 12 regional banks that make low-cost loans to home lenders, contributes 300 million annually to the cost of the thrift bailout, which has caused the system to increase its investment portfolio of mortgage-backed securities. That trend has added risks to the system.
Mike Wilson, research director of the Federal Housing Finance, Board, the bank system's regulator, said,. "On the one hand, it is true that the system's risk profile may have changed over the years." However, he said, "The system is not by any means a risky enterprise," because there are tight controls on the system's investments.
"The Federal Home Loan Bank system is by far the least risky" of the government-sponsored enterprises, said Bert Ely, an Alexandria, Va.-based bank and thrift consultant.
"Their advances are well-collateralized, but on top of that, the Federal Home Loan banks have a much higher capital ratio than Fannie and Freddie."