The Wall Street Journal
By: James R. Hagerty
June 2, 2010
The Federal Home Loan Banks are asking Congress to exempt them from a provision of the financial-overhaul legislation that would severely restrict their lending.
The legislation bars financial institutions deemed "systemically important" from lending to any one customer an amount exceeding 25% of the lender's capital. The House version of the legislation exempts the 12 regional home-loan banks from that restriction, but the Senate version doesn't. The 25% threshold would apply to any FHLB bank making a loan.
The home-loan banks, chartered by Congress in 1932, are cooperatives owned by more than 8,000 commercial banks, thrifts, credit unions and insurers, known as members. The home-loan banks' core business is making advances, loans backed by collateral, to those members, many of which rely heavily on such funds. When credit markets froze up in 2008, the home-loan banks became a lifeline for financial institutions.
The home loan banks' advances would plunge as much as about 50% if the exemption isn't granted, said John von Seggern, president of the Council of Federal Home Loan Banks, a trade group for the regional banks. "We would not be able to do the mission we were created to do--providing liquidity for housing and community development," he said. The home-loan banks' contributions to affordable-housing projects--to which they must devote 10% of profits--also would drop, he said.
Lawrence White, an economics professor at New York University's Stern School of Business, who was a regulator of the home-loan banks in the 1980s, argued that they shouldn't get an exemption. Limiting their lending would be "one way of reducing the risk to the taxpayer" of any catastrophic losses at the home-loan banks, Mr. White said.
Congress is trying to reconcile differences between the House version of the legislation, passed in December, and the Senate version, approved in May.
Spokesmen for two key lawmakers--Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, and Sen. Christopher Dodd (D., Conn.), chairman of the Senate Banking Committee--declined to comment on whether the home-loan banks should be exempted. A Treasury spokeswoman also declined to comment.
As of March 31, advances by the 12 home-loan banks totaled $572 billion, and the top 10 borrowers from the banks accounted for about 41% of that total. The biggest borrowers as of that date were Bank of America Corp., Citigroup Inc. and Wells Fargo & Co.
Giant banks have many other sources of funds, but a major drop in lending by the home-loan banks could hurt the many small local banks that rely on advances, home-loan bank officials said. With less interest income from giants such as Bank of America, the home-loan banks would likely have to charge higher interest rates.
For now, demand for home-loan bank advances is fairly weak, because banks have been able to attract lots of low-cost deposits and loan demand from their customers is down from the level of a few years ago.