In 1932 the purpose of the Federal Home Loan Bank system was housing. In 1989 it was extended to include community investment lending. In 1999 what was adopted and embraced by the Gramm-Leach-Bliley Act was the idea that small banking institutions - called community financial institutions in the legislation - need a central bank for general liquidity.
While large institutions have choices - and while serving large institutions through the Home Loan Bank system is appropriate, particularly for targeted needs and housing finance, where so much of the marketplace is supported by a government cost-of-funds advantage - small institutions have special needs.
They do not have the same choices as large institutions about where to get their funding. They cannot go directly to the capital markets. Their survival depends on a central banking function that only the Home Loan banks can provide. Helping members lend has always been a function of the system.
But to fully achieve that purpose in today's environment, Congress had to do something more, and we at the Finance Board have to do something more: expand the scope of collateral upon which borrowing from the Home Loan banks can occur.
The advances by the system to community banks of $500 million or less in assets has shown a remarkable growth over the last few years. The amount of that borrowing now exceeds $50 billion, compared to barely $10 to $20 billion just a few years ago. But all of that borrowing has required, essentially, housing assets as collateral. That has limited access to the system for many small institutions. Even those that could join have not been able to borrow to the extent they need to accommodate the growth in lending potential in their communities.
The legislation expands the scope of borrowing and the kinds of collateral that are to be made available for borrowing from the Home Loan banks, which have been lending on a relatively narrow set of collateral for most of their history.
The collateral they could accept has been limited not just to housing, but to first mortgages on housing. Congress has changed those rules so that the Home Loan banks are legally empowered to lend on all real estate collateral and, for small banking institutions under $500 million in assets, beyond real estate collateral to collateral based on small-business, small-farm, and small-agribusiness loans.
Our challenge now is to write the rules under which this expansion of collateral will take place. We estimate that more than 1,000 additional banks will be eligible to join the system based on the change in law.
The Finance Board has two things to worry about. Our primary obligation is to see to it that the activities of the Home Loan banks are carried on in a safe and sound manner. Members would not want it any other way: They invest capital in the Home Loan banks because they expect it to be secure. No one wants this expanded activity to be carried out in anything but a safe and sound manner.
But it is also not the Finance Board's intention, nor is it Congress' intention, that false concerns about safety and soundness stand in the way of fully implementing the legal opportunity that this expanded collateral presents. We do not intend to stand in the way. Our second concern, then, is that we take full advantage of the broad authorization given by this legislation.
The Finance Board will implement the legislation in a two-stage process. First, we have just published, in the May 8 Federal Register, a proposed regulation authorizing expanded collateral policies for the Home Loan banks. It is a broad rule with broad legal authorities based on the statute. It has a 30-day public comment period that runs through June 7.
We often publish rules for a longer comment period, but leaders of the banking industry in Washington and others concerned about this legislation have urged us to move quickly, and we intend to do so. What that means is that members, trade groups and other interested parties need to move quickly and let us know their concerns - what they like or do not like about the proposed rule.
Second, we will assure that we can give a broad legal reading to this expanded collateral while we focus on safety and soundness. For example, we are proposing to treat the expanded activities of the Home Loan banks in the area of collateral under a process we call "new activity approval." The process will not require a legal review of whether or not the banks are entitled to take broader collateral; that is covered by the regulation.
The Finance Board's review under new activity approval will concern whether the processes and the expertise are in place to ensure that the new classes of collateral are evaluated properly, given an appropriate haircut for the risks involved, and represent adequate value for the lending the Home Loan banks will do.
In order to do that, the Finance Board has committed to expanding its supervision staff. We will need people in the field to work with the Home Loan banks, review their new procedures and activities, and make sure that they can move forward in an expeditious way to respond to members' interest in increased borrowing.
The time frame will depend on where members are geographically. Some of the Home Loan banks will definitely move faster than others. The Home Loan Bank System's boards of directors include a broad range of representatives from the banking world - some from large institutions, some from thrift institutions, but also some from community commercial banks.
I hope the community bank members who benefit from these changes will make it their business to find out who is on the board of the Home Loan bank that serves their area and contact those directors to see to it that these changes are being given priority.
The Finance Board, as the regulator, can only do so much to see to it that this business opportunity for community banks and for the Home Loan banks is actually grasped. It is up to the community bank members of the system to come forward and to urge their Home Loan bank to move forward safely and soundly, but expeditiously.
This is new business for everybody; it is a new profit opportunity for members of the system, and it is new business for the Home Loan banks that will be gaining new members. Most importantly, this is an opportunity for more liquidity for those who need credit in the community.
Mr. Morrison is chairman of the Federal Housing Finance Board
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