A top regulator is praising a plan allowing the Federal Home Loan banks to provide advances to small banks for agricultural and commercial loans.

Bruce A. Morrison, chairman of the Federal Housing Finance Board, said the proposal made last week by House Banking Committee Chairman Jim Leach would allow small banks to remain active lenders despite a declining deposit base.

Mr. Morrison said savers are increasingly moving funds from savings accounts to mutual funds. This is creating a "deposit drought" that is curtailing community lending, he said.

"The Federal Home Loan Bank System definitely offers a proven, prudent wholesale funding mechanism to help them meet those (lending) needs," Mr. Morrison wrote in a Dec. 18 letter to Rep. Leach.

The system already is a major source of mortgage funding for thrifts and community banks, providing $153 billion in advances through Sept. 30.

Rep. Leach's plan would allow nonmortgage advances to members with less than $1 billion in assets.

In a Dec. 17 speech to the Financial Services Council, Rep. Leach said he planned to push for several reforms for the 12 Federal Home Loan banks. In addition to expanding advances to community banks, the Iowa Republican said he wants to increase the advances the system may make to nonthrift lenders to 35%, from 30%.

Mr. Morrison, who was picked to head the Finance Board in 1995, has aggressively pushed to expand the system's mission.

He praised Rep. Leach's reform plan, but pushed for broader measures. For instance, Mr. Morrison asked in the letter that the ceiling on loans to nonmortgage lenders be eliminated.

"It strikes me as sensible and equitable" to govern advances in a way that "does not disadvantage a particular class of member," he said.

Mr. Morrison also asked Rep. Leach to support pilot programs in New York and Atlanta in which Home Loan banks join with community banks and thrifts to make direct investments in multifamily housing and commercial loans. Some thrifts have complained the programs encourage the Home Loan banks to compete with their members.

Mr. Morrison said he supported Rep. Leach's pledge to revive a plan to reallocate the system's $300 million annual tab on Refinancing Corp. bonds, which were used to bail out the thrift industry.

Rep. Leach's plan would require that each bank pay the same proportion of net income to cover the bill. The current formula places a greater burden on the Home Loan banks of New York and San Francisco.

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.