The financial modernization bill approved by the House Banking Committee on Friday would remedy a host of problems facing the Federal Home Loan Bank System.
"These provisions contain all the elements of essential reform," Rep. Richard R. Baker, R-La., said in an interview Tuesday. "They will put the system in proper order to sustain itself for the foreseeable future."
The plan, which was sponsored by Reps. Baker, Paul Kanjorski, D-Pa., and Jim Leach, R-Iowa, would make membership in the system voluntary on Jan. 1, 1999, even for thrifts.
However, to ensure the system's capital base is not threatened, the measure would create a new stock system that encourages banks, thrifts, credit unions, and insurance companies to remain Federal Home Loan bank members.
To leave the system, an institution must redeem its Federal Home Loan bank stock. The bill creates a two-tier system: a basic class of stock with a one-year redemption period, and another that can't be redeemed for five years but has more attractive voting and dividend characteristics.
"Members will want to buy and hang on to the five-years-out stock to get the advantages of that class," said Brian Smith, director of policy and research for America's Community Bankers. "This would add a little more stability and permanence to the capital base of a voluntary system."
The bill also would remove the 30% cap on the level of advances the Home Loan banks may make to commercial banks and other institutions not subject to the qualified thrift lender test. As of March 31, 13.8% of outstanding advances were made to these institutions.
"We shouldn't have an artificial cap arbitrarily banning people from joining the system," Rep. Baker said.
While industry representatives and system officials generally support the legislation, some balked at a provision adding the Treasury secretary to the Finance Board.
Treasury has criticized expanding the mission of the Federal Home Loan banks, and putting its leader on the board "would be a poisonous combination," said Alfred A. DelliBovi, president of the New York Federal Home Loan Bank.
The bill also would require district banks to limit investments only to those necessary for liquidity, safety and soundness, and housing finance. Rep. Baker said this provision would prevent Federal Home Loan banks from placing excess funds in investments that do not further the system's housing and community development goals.
"Making a profit is fine, but we don't want to see investments made to the exclusion of the public policy purpose," he said.
This provision irked Mr. DelliBovi, who said member institutions may leave the system if they do not get a good return on their investments.
"This would reduce a Federal Home Loan bank's income, and income is the magnet for voluntary members," Mr. DelliBovi said. "They want a fair and reasonable return on their investments."
Still, many more provisions garnered praise. For example, system officials applauded a provision that would cut by 40%, to .6% of assets, the amount of stock an institution must buy to join the system.
This provision would reduce the amount of money coming into the district banks, which are already flush with capital, said Alex J. Pollock, president of the Federal Home Loan Bank of Chicago.
"This would be a definite positive, because right now we are getting more capital flowing into the bank than we need," Mr. Pollock said. "We would be able to better manage what those levels are."
Small banks would benefit from the bill. For member banks with less than $500 million of assets, the bill would expand the types of collateral that may back advances. It also would allow community banks to use advances for small business, agriculture, rural, and low-income community development loans.
Ron Ence, a lobbyist with the Independent Bankers Association of America, said these provisions would help small banks replace dwindling deposits.
"Money is moving out of core deposits and into the booming stock market, so small banks are facing a liquidity problem," Mr. Ence said. "These provisions will help counter that."
While Mr. Ence praised these provisions, the IBAA opposes the overall financial modernization bill. "These provisions are a jewel in a crown of thorns," Mr. Ence said.
The bill also would fix each Home Loan bank's obligation to pay interest on Resolution Funding Corp. bonds at 20% of net earnings. If this yields less than $300 million, each bank would be assessed equally to make up the shortfall.
Currently, each Home Loan bank pays 20% of earnings. However, each bank is charged for any shortfall in proportion to its outstanding advances to members insured by the thrift fund.
District banks with a large number of thrift members, such as the San Francisco Federal Home Loan Bank, have complained the current system is unfair.
The bill also would:
Require the Finance Board to approve capital standards for each district bank based on the total assets of member institutions and the level of advances.
Drop a requirement that the Finance Board approve dividends paid by Home Loan banks to member institutions.
Eliminate a rule requiring prior Finance Board approval of the salaries of Home Loan bank officers and employees.