The Federal Home Loan Bank System has gone through some interesting transitions.

At first it played a dual role. Whereas the Federal Reserve System was established to regulate the commercial banks, the Federal Home Loan banks were set up both to regulate and promote the thrift industry.

When the thrifts got into difficulties in the late 1980s, regulation became the main focus. Then the Office of Thrift Supervision got the regulatory role.

Where did the Home Loan banks turn? They became the correspondent banks for the thrifts - offering advice, a check clearing services, and liquidity.

Next, even that role was altered. Check clearing has become unwieldy and expensive for the Federal Home Loan banks to provide when so many large banks and the Fed itself are available to handle the work. As a result, the system now stresses provision of low-cost liquidity to its members, and as a result its membership has expanded to include a great many commercial banks.

At the recent meeting I attended of the Federal Home Loan Bank of San Francisco, the largest of the 12 member banks of the Federal Home Loan Bank System, the handout material showed that 81 of the 178 member institutions are now commercial banks!

My question is, "Why aren't more banks members of the system?"

According to its own profile, the San Francisco bank "acts as a ready source of low-cost credit to community-oriented housing lenders."

This is not to say that all members are small; Sanwa Bank is a member. But one thing is sure: Because of the quasi-governmental guarantee of Federal Home Loan bank paper, members can't gain access to cheaper credit any other way.

One might wonder how long the federal government will continue to subsidize, through the use of its prestige and credit standing, the borrowings of Fannie Mae, Freddie Mac, Ginnie Mae, and the Federal Home Loan Bank System. But that is another story. The wonder now is that more banks don't join the system.


The merger and acquisition market was one topic discussed by the bankers, thrift execs, and credit union officials at the San Francisco meeting.

The speakers said the days of high premiums for banks may soon be over. They said larger banks can buy top talent cheaper than they can buy institutions, so their interest in acquisitions has shifted to becoming investment companies and finance operations, which are different in scope from banking and will allow diversification.


A question from Chris Quackenbush of Sandler O'Neill & Partners generated a discussion that commanded rapt attention.

"Do we have to sell the bank to deliver value to our shareholders?" Mr. Quackenbush asked.

He had brought with him a computer model - it ran on a laptop connected to a big screen - showing how changes in dividends and other capital management techniques could improve return on equity and thus pressure to sell.

When asked how he could be objective on the issue, he showed onscreen that by improving ROE for several years a bank could get far higher value in the marketplace than it could today.

"We can be objective," he explained, because "we will get our payout eventually ... if the bank has improved profitability."

He did indicate that though an overcapitalized bank should raise its dividend, share buybacks often bring only temporary price boosts. Using the funds to build services and profits instead would provide a much better long-run result. But if there are no such opportunities, buybacks do offer benefits.


Though mergers were a main theme at the conference, there were also little items worth reporting.

*One speaker explained why banks do not want to use mark-to-market accounting on assets, even though it has to be used on liabilities. "As interest rates rise, under mark-to-market we would have to report we are making a capital gain on depositors with fixed-rate CDs - and that would be poor public relations."

*I also learned why one investment banker let a bank sell out at what appeared to be a very low multiple.

"The president wanted to sell - despite everything we could tell him about the poor state of the market," I was told. "This was the best price we could get, after considerable shopping of the bank."

Like many, I had blamed the investment bank for what was the banker's decision.

Mr. Nadler is a contributing editor of the American Banker and professor of finance at Rutgers University Graduate School of Management.

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