Comment Detail

Comment

Good afternoon,

I had the pleasure of speaking in Washington DC during your recent listening tour. I thought it would be helpful to share my remarks in written form.

My comments are based on feedback from the member banks of the WBA as well as more than 15 years working for the Federal Home Loan Bank of Seattle and later Des Moines. I have seen first-hand the benefits that the FHLB provides its members during times of crisis. The FHLBs were instrumental in providing liquidity during periods of uncertainty, most recently during the early days of the pandemic, but also during the housing crisis of 2008, the dot com meltdown in the early 2000s and the Asian Financial Crisis of the ‘90s. While bank failures occurred over this period of time, the FHLBs worked closely with regulators to facilitate orderly transitions if a bank merger was necessary and ensured the public and businesses that rely on these banks were largely unaffected. They also reduced the risks to the taxpayers from a disorderly liquidity failure like the one that occurred with Lehman Brothers in 2008.

The 2008 financial crisis was a watershed moment for the financial services industry and the FHLBs. We saw first-hand how non-traditional lenders and in some cases banks, deviated beyond traditional and prudent banking practices to create systemic risks. The proposal to expand membership to non-traditional members has the potential to introduce similar risks. While these non-traditional members may offer attractive short-term opportunities, many lack the robust oversight that banks, credit unions, traditional insurance companies and CDFIs are subject to. My members and I believe that the role of the FHLB is to buffer crisis and we are concerned that non-traditional members will only introduce more volatility rather than helping the FHLB protect depositors and small businesses.

I would also note that the financial markets are experiencing a once in a generation effort by the Federal Reserve to tamp down inflation before we return to a period of price instability not seen since the 70s and 80s. This process introduces significant uncertainty and will dramatically affect returns for financial firms of all types, including those currently seeking funding from the FHLBs. As we see the Federal Reserve Banks shrink their balance sheet, rates rise and housing prices potentially cresting, I am concerned that FHLBs will again be called upon to support deposit-taking institutions and cannot afford to be distracted by adding a risky new business segment particularly those without FDIC or NCUA oversight that will increase the risk of loss to long-standing shareholders. Critics have commented that advance demand is low right now, however this ignores the unprecedented liquidity that has been introduced to businesses and consumers throughout the pandemic that is now being withdrawn.

I also want to compliment the FHLBs on behalf of my members. In preparation for this statement, several of my members commented on the convenience that FHLB membership provides them as well as the customers and communities they serve. The ability to conveniently increase or decrease advances is a tremendous advantage in meeting the needs of businesses or home buyers that rely on their bank or credit union. Additionally, services such as security safekeeping enable banks to conveniently and efficiently hold collateral to pledge to the Federal Reserve, states, and the municipalities they serve and provide letters of credit for.

Consideration should be given to changes to the Bank’s AHP programs; however, I believe that before increasing the amount of AHP contributions, the programs should be evaluated to identify opportunities to streamline the process. I recall the incredibly burdensome obligations that were imposed on FHLBBs to evaluate, score, and then monitor requests; in some cases, costs of administering the grant exceeded the grants themselves. Any proposal to increase the amount of the AHP set aside should result first from the savings achieved by streamlining the program rather than just garnishing more of the member owners’ capital to fund the program.

I believe there are opportunities to modernize the FHLB system to enhance its sustainability going forward. Consideration should be given to identifying and removing potential barriers to consolidation. I was a part of the management team of the Federal Home Loan Bank of Seattle that merged with the FHLB of Des Moines to form the largest FHLB in the country. The merger clearly demonstrated the ability of one FHLB to serve multiple geographies. The merger was particularly noteworthy as it was accomplished without a template to follow. By combining multiple states into one FHLB, the FHLBs will enjoy more regional diversity, improved scalability by spreading fixed costs over more members and the ability to weather times of low advance demand without resorting to large investment balances. The FHFA and Congress ought to identify opportunities to reduce barriers on board size and governance to more readily facilitate the combinations of FHLBs.

In closing, I appreciate the opportunity to contribute to this process and welcome further discussion if appropriate.

Best regards,

-Glen