Bankers call for 'World-Class Regulator' at ACB convention

Northwestern Financial Review, Nov 15-Nov 30, 2003 by Bengtson, Tom

With the performance of savings and loan associations and savings banks at an all-time high, advocates for the thrift industry have turned their attention toward the supervision of the Federal Home Loan Bank system, a key liquidity source for the nation's financial institutions. Experts speaking at the annual convention of America's Community Bankers in Las Vegas Oct. 19-22 weighed in on the question of who should regulate the Home Loan Banks.

"GSEs are the hottest issue going," stated Diane casey-Landry, ACB president and CEO, referring to the government sponsored enterprises at the heart of the controversy - Fannie Mae and Freddie Mac in addition to the Federal Home Loan Banks. "We need a new, independent regulator for the Home Loan Banks - a well-funded, up-to-the-job regulator. Fannie and Freddie have no right to tell the Federal Home Loan Banks what to do."

"Fannie brought the Federal Home Loan Banks into this debate because they were looking to divert the attention away from them," explained Curt Hage, the 2001-2002 ACB chairman and president of Home Federal Bank in Sioux Falls, S.D. Hage said the current regulator for the Federal Home Loan Banks, the Federal Housing Finance Board, is structured well, but could be better. "It has not brought forth world class regulation," he said.

Hage said it would be a mistake to use the same regulator for the Home Loan Banks, Freddie Mac and Fannie Mae. "The Home Loan Banks would be overshadowed in such an arrangement," said Hage, noting how much larger the secondary market enterprises are compared to the wholesale bank.

But not everyone sees it that way. Speaking to reporters after her general session presentation, Federal Reserve Board Gov. Susan Schmidt Bies said a single regulator could do the job. "It would be easier to have one regulator. They have the same mission. Both provide liquidity to the banks," she said. Schmidt Bies also seemed comfortable with a Home Loan Bank regulator under the direction of the U.S. Treasury Department. Whoever the regulator is, Schmidt Bies said, it must be an organization that can manage risk exposure by establishing criteria for controls and capital.

Speaking to a group of invited guests over lunch, the general counsel for the House Financial Services Committee said GSEs are a committee priority. "No one wants to change the structure of the Home Loan Bank system," said Carter McDowell. "Although the desire to do something is greater now than it was before. There is a will on the committee to give GSEs a world class regulator."

McDowell said the committee looked to the Bank for International Settlements in Basel, Switzerland to identify the characteristics of such a regulator. The biggest disagreement regarding those characteristics concerns the question of which arm of the government should have the authority to authorize new products - Housing and Urban Development, or the U.S. Treasury.

"There are people who want HUD to have product approval. They don't want Treasury to have that," said McDowell. "We discussed a plan where HUD approves the products but Treasury sets the capital standards, but that arrangement wasn't enough for either the folks at Treasury or HUD, so this issue needs more time."

"ACB members own 50 percent of the stock in the Federal Home Loan Bank system," stated Russell Taylor, ACB chairman for 2002-2003. "Each of us knows how important that system is to our operations." Taylor is president/CEO of Rahway Savings Institution in Rahway, N.J.

"The GSEs are very important to the thrift industry," commented James Gilleran, Director of the Office of Thrift Supervision. "The Federal Home Loan Bank System provides 17 percent of the assets thrifts use to make loans. One percent of thrift assets is made up of Federal Home Loan Bank stock. These are institutions that have performed well. We don't want to do anything to destroy the ability of the GSEs to do as they have been doing. Our guiding principle in this debate should be 'do no harm.'"

McDowell concluded that it was unlikely Congress would act on GSE legislation this year. At about the same time, the ranking Democrat on the House Financial Services Committee, Rep. Barney Frank of Massachusetts, declared at a press conference that there was little chance legislation would pass this year.

Looking toward the future

Gilleran and Donald Powell, chairman of the Federal Deposit Insurance Corp., noted that current industry strength gives community financial institutions the opportunity to prepare for the future. "The industry is at an all-time peak in terms of its condition," commented Gilleran. "We are coming off the best two years the industry has ever had (2001 and 2002) and now the first three quarters of 2003 look very good. I don't think we have a thrift out there that is under-capitalized."

Gilleran used the stage at Las Vegas' Paris hotel to announce the impending release of two OTS surveys, one regarding the quality of the OTS itself, and the other regarding the characteristics of the nation's most profitable thrifts. he said the profitability survey shows the top institutions are focused on internal controls, have 1-rated management, and participate in the marketplace "in a broad way," making construction and consumer loans in addition to their core of traditional housing-based loans.