US Regulator Plans Overhaul of Federal Home Loan Bank System, According to Reuters

By Pete Schroeder

WASHINGTON – The U.S. regulator in charge of the Federal Home Loan Banks has released a report indicating that the system is in need of a significant update concerning its mission and structure.

The Federal Housing Finance Agency highlighted the necessity for a clearer differentiation between the roles of the FHL banks and the Federal Reserve, which serves as the main emergency lender for financial institutions. Established by Congress in 1932, the FHL banks were intended to provide liquidity to banks for the purpose of affordable housing and economic development.

The recent report marks the conclusion of a year-long review process of the FHL banks, revealing that the institutions have strayed from their original mission over time and that the system requires modernization to align with current circumstances.

“For various complex reasons, there has been a reduced focus on housing-related activities by many members of the FHLBank System,” the report noted. “These developments necessitate a clearer definition of the System’s mission so that the FHLBanks can be held accountable for fulfilling their public purpose.”

The FHL Banks consist of 11 regional government-chartered entities that raise funds for low-cost lending to their members. Over the years, they have become a crucial funding source for regional banks and have often been seen as the final option for banks seeking cash before resorting to the Federal Reserve.

Among its recommendations, the agency proposed a renewed emphasis on the housing mission, suggesting that most banks should be required to maintain at least 10% of their assets in residential mortgages to continue accessing FHL Banks.

The agency also indicated that it could potentially reduce the number of FHL banks in the system, suggesting a consolidation down to as few as eight banks without needing further authority from Congress.

In response to the report, the head of the FHL bank system stated that any proposed overhaul would be a lengthy process, emphasizing the commitment to continue serving their members effectively.

“The prevailing sentiment from the agency’s review was that stakeholders seek more functionality, not less, from the FHLBank system,” remarked Ryan Donovan, the head of the Council of Federal Home Loan Banks.