For the past 25 years, I have been a fan of the Federal Home Loan Bank System (FHLBS). Originally established exclusively for the savings and loan institutions to have a secondary market, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) opened membership to commercial banks. Since that time, nearly every commercial bank in the country has joined all of the savings and loan institutions as members. Membership has also been extended to credit unions and insurance companies. Having this variety of organizations adds to the financial power of the FHLBS to obtain the lowest cost of funds available on behalf of its member institutions.
Today 11 banks make up the FHLBS, and we in Indiana are fortunate to have one of them headquartered in Indianapolis. Over the past 25 years, the FHLBS regulator, the Federal Housing Finance Agency (FHFA), has expanded the collateralization rules available on a bank-by-bank basis. Initially, first mortgages were the only collateral that the FHLBS could accept from its members to secure advances made to the members by the individual FHLB. Last week, however, the FHFA published for comment a rule that, among other provisions, would allow all of the FHLBS banks to accept additional classes of collateral without prior individual approval. There are checks and balances that would require an individual bank to discuss the acceptance of new forms of collateral ahead of that acceptance with the FHFA.
These forms of new collateral proposed include “other real estate collateral” and “community financial institution collateral.” Other real estate collateral includes commercial real estate loans, commercial mortgage-backed securities and home equity lines of credit. Community financial institution collateral includes small business loans, small farm loans and community development loans. The addition of these categories of loans to be utilized by community banks will help relieve some of the liquidity concerns of bankers. Additionally it will give the FHLBS even more flexibility than it displayed so successfully during the 2008 financial crisis.
I realize that FIRREA was an overreaction to the savings and loan crisis of the 1980s and added significant regulatory burden to all financial institutions. However, from the standpoint of opening up and thus strengthening the FHLBS, FIRREA was a good thing. In addition FIRREA established the affordable housing and community investment programs operated by all FHLBs. Many of the member financial institutions have used these programs to lift up their communities, while at the same time fulfilling Community Reinvestment Act goals.
The FHLBS is currently reviewing the full proposal, which includes aspects that I have not addressed here. As with any regulatory change, there will be good changes and bad changes ‒ and we hope the good outweighs the bad. This has the potential to be an important expansion of the service that the FHLBS can provide to individual members. Once the analysis of the proposal has been completed, it is likely that the Federal Home Loan Bank of Indianapolis will reach out to members asking for support of its position on this proposal. Certainly a strong response from Indiana would be appreciated.
– S. Joe DeHaven