Senators questioned Thursday whether the government should further open the Federal Home Loan Bank System to community banks.
Sen. Michael B. Enzi, R-Wyo., said he had "reservations" about using the federally backed system to promote business and agricultural loans by rural banks. This would go "well beyond its original mission" of advancing funds to thrifts for home loans and could expose the government to losses, he said.
Expansion also might represent a federal intrusion into the private sector, lawmakers said during a Senate Banking Committee hearing on a reform bill introduced last year by Sen. Chuck Hagel, R-Neb.
"Congress should not institute expansion of government programs when market remedies or existing programs are sufficient," added Sen. Wayne Allard, R-Colo.
Under the legislation, banks and thrifts with assets below $500 million could obtain long-term advances from Federal Home Loan banks for small- business, agricultural, and rural development loans. Institutions also would be able to use these loans as collateral to qualify for additional advances.
Barriers to joining the system would be lowered. For instance, institutions under the $500 million-asset threshold would no longer be required to have 10% of their assets in residential mortgage loans.
Supporters of the bill argued that the boost to rural credit from the Federal Home Loan banks would far outweigh any risks.
"Advances of the Federal Home Loan banks to these smaller institutions represent only 14% of outstanding advances," Sen. Hagel said. "This is at best a very modest expansion."
Community bankers testified that the loss of deposits to mutual funds, population shifts to cities, and the difficulty small institutions have raising capital on Wall Street make them desperate for new sources of funds.
"An additional source of competitively priced loan funds would be very welcome and would help my bank to finance new and expanded businesses, new homes for the employees of those businesses, and greater economic opportunities for everyone living in my town," said Phil Burns, chief executive of Farmers and Merchants National Bank in West Point, Neb.