Comment Detail

Comment

Asset Tests

The proposed rule would impose ongoing tests requiring member institutions to hold a minimum level of mortgage-related assets on their balance sheets in order to maintain membership in an FHLBank. The FHLBank Act specifically only requires a 10 percent mortgage asset test “to become” a member. The rule would:
• Impose a new and continuing test on all FHLBank members that requires them to maintain at least one percent of their assets in first-lien home mortgage loans, including mortgage-backed securities (MBS), with maturities of five years or more to maintain their FHLBank membership.
• Require all insured depository members (other than FDIC-insured depositories with less than $1.1 billion in assets) to maintain, on an ongoing basis, at least 10 percent of their assets in a broader range of residential mortgage loans, including junior liens and MBS, in order to maintain their FHLBank membership.

Response

The proposed rule may reduce access to liquidity that FHLBank members rely upon.

The proposed rule calls into question one of the core tenets of the FHLBank cooperative: members in good standing can depend on their FHLBank as a reliable source of liquidity in all economic cycles. By imposing ongoing asset tests and redefining membership eligibility and requirements, the proposed rule introduces uncertainty to a financial institution’s membership in an FHLBank and their ability to obtain vital liquidity to serve the credit needs of their communities.

The uncertainty and instability of FHLBank membership could pose a systemic risk to the FHLBank System. Discouraging new members from joining and terminating existing members in good standing will reverse the growth of the FHLBank System. Penalizing a financial institution with lost membership or reduced access to FHLBank funding would only serve to reduce that institution’s role in the provision of housing opportunity. In addition, fewer advances will result in less money in the FHLBank System and impede its ability to fulfill its statutory mission.

The proposed rule would limit an institution’s flexibility to manage its balance sheet and add unnecessary regulatory compliance requirements and costs.

To remain financially strong and able to serve its customers, a financial institution must continually adapt and adjust its business and asset-liability strategies. While most FHLBank members meet the proposed 10% ongoing asset test and the proposed 1% (or 2-5%) ongoing long-term mortgage test, the tests are neither true indications of a role in housing nor prudent policy. By imposing ongoing, rigid, quantitative asset-based tests, the proposed rule would severely limit an institution’s flexibility to manage its balance sheet in response to changing market conditions and limit its ability to pursue strategic initiatives, such as mergers and acquisitions. The proposed rule would effectively mandate a permanent minimum asset allocation, through all economic cycles and regardless of the FHLBank services a member uses. Instead of operating in a way that is responsive to its customers and community, financial institutions could find themselves managing to regulations in a way that could weaken their financial condition.

FHLBank members serve the housing needs of their communities in a variety of ways. Some hold assets on their balance sheets that reflect a role in the residential housing market; others originate home mortgages and sell them into the secondary market; others may have a greater focus on community and economic development lending; and some may play a key role in small business lending. All of these activities help create the economic foundation for housing opportunity. These various roles that FHLBank members play in local economies strengthen the FHLBank System and should be embraced.

In addition, ongoing compliance with membership requirements of the proposed rule would impose additional regulatory burdens on FHLBank members and add uncertainty to FHLBank membership. The proposed rule has the effect of turning FHLBanks into regulatory-like institutions, unnecessarily increasing costs to the FHLBanks and increasing members’ compliance costs.

The proposed rule could alter statutorily established FHLBank mission and membership.

Over the past 25 years, Congress has broadened access to FHLBank funding and liquidity by expanding membership eligibility. While Congress has stipulated that most members must meet certain asset-related eligibility requirements to join an FHLBank, Congress has never sought to require continuous testing of such requirements or a percentage of assets to demonstrate a commitment to housing finance. We believe the proposed rule amends current law rather than establishing safety and soundness regulations to support the statute and FHLBank mission. We also believe that any changes to the statutorily established FHLBank membership, in particular changes that would narrow the FHLBanks’ mission as the proposed rule appears to do, should come from Congress first.

Existing rules and regulations preserve FHLBanks’ mission, safety, and soundness.

FHLBank members are currently subject to ongoing requirements that demonstrate commitment to housing finance. When a member borrows an advance, it must provide eligible collateral to secure the advance. Nearly all eligible types of collateral, which are determined by Congress, are related to housing. In addition, current members must certify their active support of housing for first-time homebuyers to the FHFA every two years through the Community Support Statement. These requirements serve as self-enforcing mechanisms that ensure adherence to FHLBanks’ housing finance and liquidity mission.

Captive Insurance Company Membership

The proposed rule would eliminate all currently eligible captive insurance companies from FHLBank membership.
• Current captive insurance company members would have their memberships terminated five years after this rule is finalized;
• There would be restrictions on the types and level of advances that FHLBanks could make to these members during the sunset period; and
• Any new captive insurance company members admitted after the date of this proposal would have their memberships and advances terminated upon issuance of a final rule.

Response

Although the proposed changes for insurance company memberships may not impact insured depository institutions, it does establish a dangerous precedent of a regulator redefining clear law. Insurance companies have been eligible members since the creation of the FHLBanks in 1932. Redefining what an insurance company is outside the legislative process opens a door to potential redefinition of other eligible FHLBank members.

If the FHFA has concerns about the safety and soundness of any class of FHLBank member, it has numerous and appropriate regulatory and resolution tools to enhance the safety and soundness of the FHLBank System or its members without narrowing the membership or mission.

Additional Summary Points

Under the current membership structure established by Congress, the Federal Home Loan Banks have proven to be a safe and sound business model that reliably supplies liquidity, through all market cycles, to a broad range of cooperative members for a variety of uses. Even during the nation’s recent financial crisis, when disruptions to the capital markets made funding from other sources unavailable, the FHLBanks were a critical source of liquidity for us and other U.S. financial institutions. Our FHLBank has reliably supported the Southeast region for more than 80 years and we are not aware of any credit loss or safety and soundness issues the FHLBanks have experienced associated with doing business with FHLBank members.

The proposed rule would result in a fundamental change to an FHLBank System that has and continues to work well. It will constrain the FHLBanks’ ability to serve their members and the communities these members serve; terminate memberships or increase the costs on current members in good standing; and ultimately reduce liquidity, tighten credit, and restrict the flow of funds for housing and economic development.