WASHINGTON - Community banks may pledge agricultural and small business loans as collateral for advances from the Federal Home Loan banks under a regulation approved Thursday.

As required by the Gramm-Leach-Bliley Act of 1999, the Federal Housing Finance Board unanimously adopted a rule that enables banks with less than $500 million of assets to pledge additional classes of collateral and use the advances to make a broader range of loans. Analysts estimate that approximately $400 billion in additional collateral may become eligible under the new rule.

The rule also removes a limit for all members on the amount of advances that can be secured by real estate-related collateral other than mortgages.

Regulators and industry activists welcomed the vote as a crucial tool to help smaller banks compete.

"This rule is critical to the funding needs of many community banks that are members or potential members" of the Federal Home Loan Bank System, said Finance Board Chairman Bruce A. Morrison. "Since more community banks will be joining the System and existing members will be able to borrow more, we hope to see a significant increase in lending in underserved areas."

"Many community banks are anxious to use these new authorities," said Thomas J. Sheehan, president of the Independent Community Bankers of America. "More and more community banks are having difficulties attracting and maintaining deposits to meet the funding needs of the communities they serve," Mr. Sheehan said, and the Home Loan banks "are their only real funding alternative."

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.