A critic of the Federal Home Loan banks is advocating for the system to be reconstituted as public benefit corporations.
Some of the best-known public benefit corporations are retailers with a special focus on environmental and social issues — including ice cream maker Ben & Jerry's, crowd-funding website Kickstarter and clothing brand Patagonia. The idea is aimed at requiring each of the 11 banks' boards of directors to balance the system's for-profit business of providing liquidity to its members with its public mission to fund affordable housing and community development programs.
The $1.6 trillion-asset Home Loan Bank System is under scrutiny after the failure earlier this year of three banks — Silicon Valley Bank, Signature Bank and First Republic Bank. Those three banks collectively borrowed $53.1 billion from the system and failed after a run on deposits at Silicon Valley Bank sparked a broader liquidity crisis in the banking system in March. Hundreds of healthy banks also tapped the Home Loan Bank System, which injected billions into the financial system in the first half of 2023.
"Had the board and management of the Federal Home Loan banks been required to balance the public interest in making these loans before extending $53 billion in advances to these troubled institutions, the liquidity crisis may have been averted," said Cornelius Hurley, an adjunct professor at Boston University School of Law. Hurley served 14 years as an independent director of the Federal Home Loan Bank of Boston and has become one of the
Last year, the Federal Housing Finance Agency
The system of 11 banks, stretching from Boston to San Francisco, has long been considered a 'lender of next-to-last-resort,' because its members can tap cheap funding in lieu of going to the Federal Reserve's discount window, which carries a stigma for investors.
Next month, FHFA Director Sandra Thompson is expected to release a report with policy and congressional recommendations from its review. Thompson worked for more than 23 years at the Federal Deposit Insurance Corp., where she most recently served as director of the division of risk management supervision.
The upcoming release of the review is causing angst among the Home Loan Banks and its members, particularly community banks. Several experts said the idea of amending the banks' certificates of organization to become public benefits corporations did not come up in the review, which included 19 regional roundtables and hundreds of public comments to the FHFA.
"I don't recall this idea being seriously discussed during FHFA's comprehensive review, and it isn't clear what problem an idea like this would solve," said Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, a trade group for the system. "All stakeholders are eagerly anticipating the release of the report and at this point, it's better to wait for FHFA to show their work than to respond to rumors and hypotheticals that were not a significant part of the feedback the agency has received."
Public benefit corporations, sometimes called B corporations, are a type of for-profit entity recognized in 40 states and the District of Columbia. Unlike C corporations or S corporations, which must place primary focus on short-term financial gains and maximizing shareholder value, PBCs can take other factors into account such as environmental or labor issues that do not increase profits.
PBCs have three requirements: a statement of the corporate mission in their chartering documents, specific duties required of their boards of directors and independent third-party reporting or oversight.
Christopher Marquis, a management professor at the University of Cambridge and author of "Better Business: How the B Corp Movement is Remaking Capitalism", said he doesn't know of any government entities that are public benefit corporations. But he said "it makes a lot of sense," for the Home Loan banks largely because they already have a public mission.
"They could functionally be public benefit corporations with governance features and additional language and requirements in their legal documents," Marquis said, adding that if the duties of the directors and the government "are misaligned, this creates a lot of tension, confusion and difficulties."
There are currently 10,000 to 20,000 public benefit corporations in the U.S., though exact figures are hard to come by because many states do not report the number of PCBs chartered in their states.
The Home Loan banks have statutory obligations and mandates that are far more stringent than a typical PBC. After the savings and loan crisis in the 1980s, Congress expanded the banks' membership to include all depository institutions and mandated that 10% of the system's profits fund affordable housing and community development programs. Ahead of FHFA's review, the system has agreed to voluntarily increase the amount of funding for affordable housing and community programs to 15%. Some of the banks say they are already hitting that target. Many experts think the FHFA's review will increase the mandated amount to between 15% to 20%.
The banks, which are privately-owned, self-capitalized and independently operated, already view themselves as private enterprises with a public purpose. Each bank has its own board that approves a myriad of programs providing grants to nonprofits. For example, the Home Loan Bank of Dallas provided nearly $2 million in grants to help homeowners replace their roofs after recent storms. The Home Loan Bank of New York recently
"It would be hard to shoehorn something as complicated as the Home Loan banks into a brand new legal structure," said Mark T. Williams, a master lecturer in the finance department at Boston University's Questrom School of Business. "I'm not convinced that the Federal Home Loan Bank model is broken."
He said there would be concern that amending the bank's certificates of organization would have unintended consequences, such as potentially changing their consolidated cost of capital and impacting the debt ratings issued by Moody's Investors Service and Standard & Poor's.
"What would the implied guarantee look like and how would funding costs be impacted?" asked Williams, a former Fed examiner and banking expert.
He and others cautioned that the Home Loan Banks are required to lend to members that pledge adequate collateral in exchange for loans. He also noted that the system was not responsible for the March liquidity crisis.
"The 2023 bank failures weren't caused by FHLB lending but by a lack of strong regulatory oversight and an abundance of poor risk management," he said.
Lawrence White, professor of economics at New York University's Stern School of Business, said the system needs more transparency and oversight. He said policymakers should consider ways to scale back the banks' role by requiring public disclosure of loans to its members — known as "advances" — and by linking the advances tightly to housing credit. The FHFA could also limit the growth of advances by individual Home Loan banks, to the system as a whole or to members. FHFA also could impose limits on membership.
"Because they are government-sponsored enterprises, they are able to borrow more cheaply in capital markets compared to any other corporation, but what public service are they providing?" said White, who served in the late 1980s as a member of the Federal Home Loan Bank Board, a predecessor to the FHFA. "They need more sunlight."
Some bankers have embraced their status as public benefit corporations amid a backlash from Republicans against environmental, social and governance policies from the
Ivan Frishberg, chief sustainability officer at Amalgamated Bank, said many corporations are being sued by investors for what he described as "doing good in the world." Amalgamated faces less legal jeopardy in executing its mission, he said, noting that multiple lawsuits have been filed against companies including law firms for having diversity programs in the wake of a recent Supreme Court ruling on affirmative action.
"A public benefit corporation gives you a layer of legal protection because you're serving a larger public benefit," Frishberg said. "It starts with the mandate at the top overseen by the board of directors. In our case, if management said: 'Here's a way to make a lot of money,' but it's inconsistent with our mission, then the board of directors would say, 'What the heck is going on here?' "
Hurley is advocating for the FHFA to add simple language to the certificates of organization for each of the 11 Home Loan Banks that would generically state that each bank "promotes housing and community economic development financing opportunities for Americans at all income levels."
He also suggests adding language that says the bank "promotes the economic development of communities within its district," and "the bank ensures that housing finance and economic development financing is environmentally sustainable."
"It's hard to imagine a group of companies that, considering their subsidization by the government, is more suitable for the PBC model," Hurley said.
