FHLBs will keep evolving to help bankers

Northwestern Financial Review, May 1-May 14, 2003 by Dullum, Justin

Q: What new products are Home Loan Banks offering?

There are a few aspects to some of the shared funding products that are new. We will be offering the securities created by shared funding to our members as investments. Right now, many financial institutions are deposit rich and loan demand has been poor. Banks would like to have more asset opportunities. Home Loan Banks in the past have never offered assets to their members. We've only been a liability supplier. We could make you a loan when deposits are down and loan demand is high. But when it's the other way around, banks need an asset product. So we will be able to offer AAA mortgage securities. These will be very high quality assets created by the home loan banks in partnerships with their members that offer these investments out as asset opportunities to other members.

How is the once controversial Mortgage Partnership Finance program coming along?

What's controversial is each new thing you try. As things become successful - and MPF has become very successful -- they cease to be controversial. When we started MPF, it was always referred to in the press as 'the controversial MPF program.' Then it became the 'innovative' program. Now, people refer to it as the 'popular' MPF program. Now we're bringing out something new, where we create securities out of loans. In some peoples' minds that's controversial because it's different. But I'm sure in time that this will also be very successful and will be accepted by everybody.

Should Home Loan Banks register with the SEC?

That is a discussion that probably has more emotional fervor attached to it than it deserves. There are a set of interesting issues about how you take the Home Loan Banks, which are unusual compared to normal corporations, which operated under a federally mandated structure - the Federal Home Loan Bank Act - and compare them to SEC regulated companies. What we have is a financial and organizational structure that reflects a lot of political compromises made in Congress. I think all home loan banks have said they want the highest quality financial reporting and our view in Chicago is less tinged with heat. We view this as a calm, rational discussion we're willing to have with the SEC, the Federal Housing Finance Board, the Treasury and the other Home Loan Banks, and work through these issues and figure out what makes sense.

Should the Home Loan Bank system consolidate?

There's no doubt that the current 12-bank structure will endure for as far as anyone can see into the future. Whatever theoretical discussions one may have about the number of Home Loan Banks doesn't really matter because it's going to continue as it is.

What's your take on banks being members of multiple home loan banks?

In Chicago, we have a very well-defined position on this issue. If there are two Home Loan Bank members and they merge into a single charter, they should have the option, if they want, to continue both memberships. In that case, but no other, you would have a multiple district member. The reason is to stabilize the Home Loan Banks so they don't have large shifting chunks of business. The other idea is if you have a large member, instead of having one bank relying on that member for a good deal of activity, you distribute that business to the other banks as much as possible. In legal terms, a merged entity continues to have all the rights, obligations, duties and privileges of both entities that merged.

Why should Home Loan Bank membership be any different?

What's your sense of how regulators view over-reliance on Home Loan Bank funding?

Use of Home Loan Bank funding gained a lot of acceptance the last decade. Thrift regulators have always been comfortable with Home Loan Bank use. When Home Loan Banks were opened to commercial bank membership in 1989, commercial bank regulators needing some time to figure it out. Membership in Home Loan Banks, by anyone's measure, proved itself to be extremely beneficial over the last decade. Now, as with anything, you can go to excesses. If a bank has an excessive amount of Home Loan Bank loans on the balance sheet, I suppose an assessor would take notice. But that's the same with anything. And we work hard to make sure our members know how to use the Home Loan Bank properly.