The Federal Housing Finance Board has just finished a series of hearings aimed at helping it develop legislation to overhaul the Federal Home Loan Bank System, which it regulates.
In an session with American Banker reporters last week, Nicolas Retsinas, an assistant HUD secretary who sits on the Finance Board, and Rita Fair, the agency's managing director, said they expect the legislation to be ready in the first quarter.
The proposal will aim to codify the mission of the system, revamp its governance and regulation, and provide for voluntary membership and some form of permanent capital, he said.
During last week's hearings, two capital-structure alternatives that could pave the way for voluntary membership were suggested to the Finance Board.
* The first option would mirror the current structure but would restrict stock redemption.
* A "two-tier" model would create a designated permanent base of common stock.
Currently, federal savings and loans are required to own stock in the system, while commercial banks, which make up over half of the system's membership, are not restrained from leaving and taking their capital with them.
Excerpts from the interview follow.
Q.: What did you learn at last week's hearings?
RETSINAS: I think the preliminary observation is that the system has been responsive.
While there was an agreement that certain parts of the system and certain issues need to be addressed, at the same time we did not hear feedback that the system was broken, which coincided with our observations here of the system over time.
So I thought the hearings were very beneficial. While it was time consuming, I think it was time efficiently spent, because it will build a base for future work on the system.
Q.: Was voluntary membership a big issue during the hearings?
RETSINAS: The hearings reaffirmed the consensus of the various studies, which is that over time voluntary membership is a prerequisite for an efficient system. As to how we get there, there are many issues.
There are continuing obligations regarding Refcorp [the Resolution Funding Corp.! and obligations regarding the Affordable Housing Program. We need to make sure that as we transition to complete voluntary membership, we are mindful of those obligations.
So I don't rule out going to voluntary membership expeditiously -- we just need to be aware of those transition issues.
Q.: Do you think many thrifts would leave the system if the membership was voluntary?
RETSINAS: That's hard to say. I don't know what they would do, but thrift membership is the issue here.
That's the reason why we are holding the hearings, to make sure that all the affected parties _can participate in the deliberations.
In a sense, the issue of voluntary membership is linked to capital structure. Once you address one question, by necessity you are addressing the other question.
Q.: What is the barrier to creating a permanent capital structure?
RETSINAS: You have to source it and figure out where it comes from, and how "permanent" is defined. I think that we have looked at a variety of options.
The bank presidents have commissioned their own study, which we encouraged them to do. They have some preliminary findings, but their conclusions have not yet been adopted.
Early on we looked at the injection of outside capital into the system, but that would appear to be inappropriate. Generally speaking, external capital requires a certain return, and given the financial structure of the system, it would be difficult to generate that kind of return and still do what it is doing now.
FAIR: Another part of that is that there are really strong sentiments within the system and in some parts of the administration that the system should remain a cooperative.
That's why, in terms of one-tiered and two-tiered capital, some people view going to a two-tiered capital structure as a step away from being a true cooperative. That's one objection against the two-tiered structure.
Q.: Can't you just convert the stock that members hold now into permanent capital?
RETSINAS: It depends. What I hope our legislation will do is define clearly the capital structure of the system over time.
It is important to understand the phrase "over time." I think we nave a responsibility to outline what that endgame will look like, as it relates to the capital structure, and that will be our goal in the legislation. That would include such issues as conversion of capital stock.
Whatever we do has to address the issue of existing capital stock, because you are not starting with a blank slate. We are starting with a system that has a capital base, so how do we convert that capital base in a way that makes sense? That's one reason why we have conducted these public hearings.
Q.: Is placing performance goals on institutions that take out cash advances something that will be addressed in the legislation?
RETSINAS: One of the difficulties with the nature of this system is that money and the advances are very fungible, and it is difficult to track them.
How do we unintrusively ensure that the mission is carried out?
If you do it intrusively, then you create a paperwork exercise, and you end up with a gaming of the system. The idea is not to impose additional requirements for the sake of requirements.
I'm not sure whether performance goals are the right way to do it.