Without a doubt, the Federal Home Loan banks operate with clear social purpose and accountability. Those who argue otherwise demonstrate a fundamental misunderstanding of Congress' mission for them and a lack of appreciation for the issues facing small banks.

First of all, the Home Loan banks' record is impeccable. They have never lost money. Federal regulators examine them for safety and soundness as well as for mission fulfillment, and they are held to strict asset quality guidelines.

When Congress chartered the 12 banks in 1932, it intended them to act as intermediaries between the national financial markets and local lending institutions. That was a critical need in 1932, and it remains one today, as amply demonstrated in recent Federal Reserve Bank studies and congressional hearings.

The Home Loan banks ease the flow of capital through lenders large and small into local communities.

In that way they help develop and sustain local housing markets and give Americans a more affordable chance to buy a home.

Asking the Home Loan banks to track advances as they flow into local communities, as some have suggested, would be counterproductive to fulfillment of their mission.

These banks support local housing lenders, which in turn lend to Americans. Our success cannot be measured by the money we directly provide to homeowners. Rather, it should be measured by the volume of housing loans and investments of our member banks.

By making short-term funding available, we provide a reliable source of liquidity, thereby allowing members to have more of their assets in loans to their communities. Short-term advances by the Home Loan banks are used extensively in housing finance to fund adjustable-rate mortgages. Our longer-term funding is an important tool for our members to manage interest rate risk, a crucial element in home lending.

Furthermore, Home Loan banks cannot lend to just any depository institution. A commercial bank or savings institution cannot join unless a significant portion of its assets is in home finance.

That test alone excludes many depository institutions, particularly many of the largest money-center banks.

Moreover, not one dollar goes out the Home Loan banks' doors until a member first pledges collateral, most of which is in the form of assets related to housing finance.

Home Loan banks are particularly important today, given the current funding problems of smaller banks.

William R. Keeton, senior economist at the Federal Reserve Bank of Kansas City, best states the issue: Small banks in both rural and urban markets face funding pressures due to weak deposit growth, and this is reason to consider measures to improve small banks' access to open-market funds (Economic Review, second quarter 1998).

Home Loan banks are a critical funding source for smaller banks. The benefits of offering short- and long-term funding to small and rural banks through the Home Loan banks are clear.

Perhaps some of the objections to Home Loan bank reform represent a bias against smaller banks and against rural lending.

While supporting depository institutions, the Home Loan banks perform several other duties required by Congress.

First, they grant over 10% of their net income to the Affordable Housing Program. Since 1990 they have contributed about $640 million to help more than 164,000 very-low-income families meet their housing needs.

The banks also send $300 million a year directly to the Treasury to pay interest on bonds sold to bail out the thrift industry and will continue to do so for many years to come.

The Federal Home Loan banks, through their 6,700 local lenders, serve a vital social purpose-the purpose Congress has asked them to serve. The Federal Home Loan Bank System, as it has for the last 66 years, continues to be a vital part of the most successful and sophisticated housing finance system in the world.

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