The financial reform bill, though focused on large institutions, would make it easier for community banks to borrow from the Federal Home Loan banks.

Banks with less than $500 million of assets-nearly 90% of the membership in the 12 district Home Loan banks-could borrow funds by pledging small- business and farm loans as collateral. Under current law, a Home Loan bank advance may be backed only by residential mortgage assets.

What's more, a bank would no longer be required to have at least 10% of its assets in residential mortgage loans to qualify for membership.

For small banks, these changes are considered the best reason to support the reform bills approved by the House and Senate this summer.

"In my mind, there isn't anything in there for us besides this," said William L. McQuillan, president and chief executive officer of City National Bank in Greeley, Neb. "It's a pretty massive bill, and we need to have this in there, certainly, for our support."

Deposits at smaller banks often are insufficient to satisfy consumer, farmer, and small-business loan demand, bankers said. Home Loan bank advances also give small banks with short-term deposits and longer-term loans a way to "manage our interest rate risk," said Dale J. Torpey, president of Community State Bank, a $56 million-asset institution in Tipton, Iowa.

Community State has about $6 million of advances outstanding. Without access to a Home Loan bank, Mr. Torpey said, he could not make 15-year, fixed-rate real estate loans because the average life of deposits is 12 months.

"It's come down to, it's going to be our only funding source," said Mr. Torpey, who is on the board of the Des Moines Home Loan Bank.

"We're sitting out here," he added, with "credit unions, all these mutual funds, and now this e-banking. There's so many people who want a piece of the deposits. That's why it's difficult for us to cover the loans."

Deposits are shrinking in communities where older customers have died and younger people opt for mutual funds, said Robert N. Barsness, chairman and president of Prior Lake (Minn.) State Bank, a $95 million-asset institution. This trend limits traditional loan funding for smaller banks, which do not have much presence in capital markets.

"We need other sources, and the Federal Home Loan Bank is an excellent vehicle to provide lending," he added.

Other options are not considered as cost-effective as a Home Loan bank advance. For instance, certificates of deposit bought from other institutions are "way too costly," Mr. McQuillan said.

He said City National did not meet the Home Loan bank membership requirement that 10% of its assets be related to residential mortgages- until he bought mortgage-backed securities.

"There was no other way I could join," he said. "If I made every loan in town, I wouldn't come close to the threshold."

Country Bank USA in Cando, N.D., would also not be eligible without mortgage-backed securities, said president and chief executive officer Terry J. Jorde. "If you have to spend money to borrow money, you're not really ahead with liquidity," she explained.

Since banks were allowed to join in 1989, they have become a force in the Home Loan Bank System.

The average asset size of the 6,040 bank members was $432 million as of March 31. The 942 thrift members had an average asset size of $825 million, according to the Federal Housing Finance Board, the system's regulator. Banks held about half of the $295.1 billion of advances outstanding at March 31.

The finance board does not know how much more borrowing community banks could do under the bill.

The House and Senate bills would end mandatory membership for thrifts and replace the system's flat $300 million annual contribution to the Resolution Funding Corp. with annual payments equal to 20.75% of each Home Loan bank's net earnings.

The House bill would revamp the capital structure of Home Loan banks by letting them issue two more classes of stock to members. The Senate version simply calls for a study on capital.

A conference committee is to reconcile the two versions. Negotiations are expected to continue into the fall.

The Clinton administration supports increased Home Loan bank lending to community banks but opposes changing the system's capital structure. Still, most of the Home Loan bank provisions are expected to survive intact if the bill is enacted.

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.