WASHINGTON - House Banking Committee Chairman Jim Leach on Wednesday warned Federal Home Loan Bank System officials against depositing money in Japanese banks.

At a hearing before House Banking's capital markets subcommittee, the Iowa Republican criticized the 12 Home Loan banks for moving away from the system's original mission of providing funding to mortgage lenders.

"Private-sector institutions tend to borrow from the Federal Home Loan Bank System less to promote housing than to boost profits," Rep. Leach said. "How is that in the public interest?"

Rep. Leach focused on the fact that Home Loan banks hold about $2.5 billion in short-term Japanese bank products, such as certificates of deposit and repurchase agreements.

In the first half of September, the banks withdrew about $500 million from Japanese banks, Finance Board Chairman Bruce A. Morrison testified at the hearing.

The subcommittee will hear testimony from some of the Home Loan bank presidents today. Rep. Richard Baker, R-La., who heads the subcommittee, is pushing legislation to modernize the system.

Rep. Leach criticized a provision in Rep. Baker's bill that would divert decision-making authority away from the finance board and out to the 12 district bank boards.

Delegating more discretion to the banks, Rep. Leach said, "is a prescription for even more mushroomed growth and a crowding out of the private sector by governmentally privileged enterprises."

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