Recently
Policy experts and analysts say these higher costs would not be insurmountable, but noted that those higher costs could have ripple effects that reshape certain funding markets and, potentially, contribute to broader changes in the banking sector.
This week, the Federal Housing Finance Agency rolled out a
Derek Tang, co-founder of the Washington-based research firm Monetary Policy Analytics, said such changes would push banks toward the
He added that for day-to-day liquidity needs, banks would likely be more active in the commercial paper market and more apt to pay up for certified deposits, or even pay higher rates on demand deposits — moves that could carry consequences for the banking sector.
"That obviously erodes bank profitability, the net interest margin, and the regulators might not like that either," Tang said. "But, it does seem like it's accelerating this idea that there's going to be consolidation in the industry, which is something regulators are probably okay with, given how things are going, if banks need scale to compete."
Tang added that less lending by the FHLBs could have impacts on other parts of the financial system, such as money market funds, which often purchase debt issued by the home loan banks to finance advances to their members. Tang said this outcome would not necessarily be negative, as it would free up the ability of funds to buy Treasuries and other assets, but it is a variable to monitor.
In its report, the FHFA called for a
Created by the Federal Home Loan Bank Act of 1932, amid the Great Depression, the FHLB system was designed to be a support mechanism for thrifts at a time when they played a central role in the home finance market but lacked access to the discount window. But, as the report notes, the authorizing legislation was so broad that it placed few restrictions on what entities could be members of the system or what they could use advances for.
Former FHFA Director Mark Calabria, now a senior advisor to the Cato Institute, said the home loan banks — which lend funds in exchange for collateral such as mortgages, mortgage-backed securities and other real estate-related loans — perform no function that is not duplicated elsewhere in the financial system. They simply do so more efficiently, he said, thanks to government-imbued advantages, including tax exemptions and superlien authority over other creditors in the event of a borrower's bankruptcy.
"There are alternative sources of normal liquidity in the form of deposits and [repurchase agreements]. Those things will be more expensive, but that liquidity won't go away," Calabria said. "Where it would shift is an important question, but fundamentally there's nothing the home loan bank system does that others in the financial system don't also do — they probably just do it in a more expensive manner."
Others see an environment in which FHLB funding is harder to come by as being a net positive. They note that the Fed's discount window is better equipped to provide liquidity in a pinch. The Fed can issue liquidity at will — as long as
Some also say forcing banks to handle their funding issues — both emergency and otherwise — more diligently, would carry its own benefits. David Zaring, a law professor at the University of Pennsylvania's Wharton School of Business who specializes in financial regulation, said the FHLB system has become a crutch for many banks, allowing them to make payroll, smooth out earnings and stave off insolvency, all at discount pricing.
"The bank should be managing its risk on its own," Zaring said. "The ability to go to the government and get an inexpensive loan to deal with those kinds of issues seems to me more like a subsidy to the banking system than something a free market advocate would say is a good idea."
Banks themselves are less enthusiastic about the idea of having what had been a cheap and reliable funding source become more expensive and encumbered. In a statement released in the wake of the FHFA report, American Bankers Association President and CEO Rob Nichols called the FHLBs an important source of liquidity and expressed "concern" about certain policy recommendations.
Rebecca Romero Rainey, president and CEO of the Independent Community Bankers of America, was more pointed in her remarks, calling on the FHFA to "ensure any actions it takes on the Federal Home Loan Bank System do not disrupt this important source of liquidity for community banks."
Zaring said the strong support the home loan banks have from industry allies and others in Washington will make it difficult to implement the entirety of the FHFA's agenda, including the types of lending limitations considered in the report.
"I am unconvinced that there's the political will to reform the Federal Home Loan banking system in the way that I would like to see it reformed," he said. "There's a constituency for it, certainly among bankers and people who worry about housing and affordable housing. Those people aren't going to want to take away a tool that is supposed to incentivize housing lending. Nobody likes to preside over a housing crisis, so I'm not sure Congress or the president is going to be inclined to remove a source of funding that might, at the margin, make homes cheaper and might, at the margin, make obtaining financial services more expensive."
