Federal Home Loan banks launch opposition to FHFA reforms

Adobe Stock

The Federal Home Loan banks have asked the Federal Deposit Insurance Corp. to recognize their private bank cooperative as a "lender of last resort." 

The Home Loan banks' top lobbyist on Thursday asked the FDIC to confirm that the private consortium of the nation's banks can continue to be an "emergency lender" for banks in distress or failing.   

The request flies in the face of the system's regulator, the Federal Housing Finance Agency, which published a 115-page report last month that included 50 recommendations to reform the government-sponsored enterprise. In the report, "FHLB System at 100," the FHFA raised questions about whether the Home Loan banks should be lending to troubled institutions given that the Federal Reserve has long been considered the banking system's lender of last resort. 

Last week, FHFA Director Sandra Thompson said that the Home Loan banks often ended up as "de facto" lenders of last resort because its member banks are not all set up to tap the Federal Reserve's discount window. During the March liquidity crisis, the Home Loan banks lent large sums to Silicon Valley Bank, Signature Bank and First Republic, calling into question the practice of doling out billions of dollars to troubled banks just weeks before they failed. 

Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, the system's trade group, said he wants the FDIC to expressly state in an upcoming regulation that tapping the system for liquidity should be part of any resolution plan for failed banks. He submitted a comment to the FDIC on its proposal requiring banks with assets of $100 billion or more to better plan for their potential failure in a way that lessens the likelihood of a rushed over-a-weekend sale. 

In the letter, Donovan wrote that the FDIC had acknowledged the role of the Home Loan banks in the preamble of its proposed rule on resolution planning. He asked the FDIC to specifically include the language from the preamble in the final rule.

"If the [covered insured depository institution] is a member of a Federal Home Loan bank, a resolution submission must include a discussion of its approach for using Federal Home Loan bank liquidity if applicable," Donovan wrote. 

Banks on the brink of failing have already pledged collateral and tapped the Home Loan banks for liquidity or sought to renew existing loans, known as advances. The FDIC often requests that the Home Loan Banks continue to provide liquidity because it gives the regulator breathing room to find a buyer, or a bridge depository institution. 

Donovan took aim at the FHFA's recommendation that the Home Loan banks evaluate a member bank's ability to repay existing advances. He also said the FHFA's suggestions will likely limit access to advances when they are needed the most. 

"FDIC-insured banks, whether large or small, should not be forced to fail by an FHFA 'ability to repay' underwriting requirement," he wrote. "If there is adequate collateral pledged to the FHLBank, and the primary regulator and the FDIC concur that the troubled bank should try to be saved, FHFA regulations and exam mandates should not strip the final underwriting decision to lend away from the primary regulators and a FHLBank's board of directors." 

Politics and policy

Home Loan banks should check more than collateral, FHFA chief says

In her first remarks since the release of a sweeping report on the banks, Federal Housing Finance Agency Director Sandra Thompson urges them to strengthen underwriting and communication with their members' regulators.

By Kyle Campbell

November 20

Thompson said at an event last week that the Home Loan banks need to do more to assess the financial condition of their members before advancing them funds. 

"You can't just have collateral-based lending," said Thompson, who spent more than 23 years at the FDIC, including as a director of the division of risk management supervision. "You've got to take a look at the financial condition of the member, because if the bank fails … those losses get absorbed by other banks and it's a bigger ecosystem. The Home Loan banks say they've never had a loss, but when a loss takes place … all will pay, we pay, the public pays."

The letter marked the opening salvo of the system's opposition to FHFA's reform efforts. 

"While increased FHLBank underwriting and coordination with the Federal Reserve banks as recommended in the System 100 Report has merits, the longstanding role of emergency lender for the FHLBanks to address run contagion and provide a liquidity backstop for the deposit insurance funds should not be disrupted," Donovan wrote. "This is a very serious issue, especially in situations where a Federal Reserve bank may not have prepositioned collateral to provide emergency liquidity or the Federal Reserve bank needs supplemental liquidity from a FHLBank in times of crisis." 

Cornelius Hurley, professor at Boston University School of Law and a former member of the Home Loan Bank of Boston from 2007 to 2014, said the letter is a sign that the system is going to fight reforms.  

"This is an early indication that the Home Loan banks will be digging in their heels to resist any change to improve the system," said Hurley, who helped create the Coalition to Reform the FHLBs.