The chances or passage this year of legislation designed to broaden membership in the Federal Home Loan Bank system declined last week when the Treasury Department and the Office of Thrift Supervision urged further study of the issue and the presidents of the 12 FHL banks did not make a strong case for the changes being urgently needed.
Nonetheless, three days of hearing before the Housing and Community Development Subcommittee of the House Banking, Finance and Urban Affairs Committee laid a solid foundation for dramatic change in the FHLB system when the next Congress meets.
The subject of the hearings was the Federal Home Loan Bank System Modernization Act (H.R. 4973), which would:
* Limit the annual contribution of the FHLB System to the Resolution Funding Corporation to the lesser of $300 million or 20% of the aggregate net earnings of the FHL banks;
* Equalize the eligibility rules so banks would be on the same footing as the eligibility rules for savings and loan institutions;
* Make membership voluntary for thrifts as well as banks;
* Permit a reduction in the number of Federal Home Loan banks to eight from he current 12; and
* Order a study f the feasibility of an "affiliate" membership for mortgage bankers.
The sponsors,Reps. Stephen L. Neal, D-N.C., and Richard H. Baker,R-La., were prepared to offer it as an amendment to the Housing and Community Development Act (H.R. 5334) during markups last month. but Rep. Henry B. Gonzalez, D-Texas, chairman of both the full committee and the subcommittee, persuaded them to hold off until after the hearings. They plan to offer the legislation as an amendment to H.R. 5334 when the full committee takes it up June 16.
The priority item for the 12 bank presidents and for Chairman Daniel F. Evans Jr., of the Federal Housing Finance Board, regulator of the FHL banks, was the 20% cap.
The proposal to contribute $300 million to REFCORP was derived by calculating 20% of the system's 1988 net earnings, Evans noted. But since then, the FHLB system's earnings have decreased substantially, mainly due to the failure of many of its thrift members, and the $300 million payment to help pay for the thrift bailout has risen from 7% of net earnings in 1989 to a projected 37% of net income in 1992. This, Evans said, compares with a corporate tax rate of 34%.
Evans and the bank presidents were repeatedly asked when the $300 million payments would seriously damage the banks' profitability, but they were hesitant to make any predictions that would suggest that the safety and soundness of the banks was at stake.
Jonathan Fiechter, deputy director for Washington opertions or the OTS, said the committee shouldn't act on a few aspects of the FHLB system. "In our view, adjustments to the bank system should occur as part of a larger restructuring of the framework that governs the thrift industry," he said.
The OTS, he announced, will hold hearings in July on its proposed regulation that would require the thrifts it regulates to be members of the FHLB system, a rule in direct conflict with a provision of the Neal-Baker bill.
He was sympathetic to the argument that the Resolution Funding Corporation payment may be too high for the dwindling membership of the FHLB system, but he testified that the bill's provision that any shortfall be made up out of the Savings Association Insurance Fund could result in SAIF premiums "so high that they (would) adversely affect the thrift industry's recovery."
Treasury Department testimony strongly opposed the provision to ease stock purchase requirements or commercial banks. John C. Dugan, assistant secretary for domestic finance, said the FHLB system "is relatively safe now because of high, self-imposed capital requirements."
To lower capital requirements for banks, he said, "could significantly change the safety profile of the system." Moreover, said Dugan, the proposal could expand the membership to all 11,800 commercial banks from the current FHLB total of about 800. "Such significant changes should not be made without further study," he said. Both the House and Senate banking committee versions of legislation to regulate the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation contain provisions mandating a comprehensive study of the FHLB system.