WASHINGTON — A House subcommittee debated whether, and what kind of, legislative changes should be made to government-provided emergency liquidity for banks, including money from the Federal Reserve and the Federal Home Loan banks.
Rep. Andy Barr, R-Ky., chairman of the subcommittee on financial institutions and monetary policy, said that it's "an open question" as to "whether legislation may be needed to address some of the problems in the Fed's liquidity provision" that it set up last March amid the turmoil in regional banks.
"Part of that reexamination involves the role played by Federal Home Loan bank loans in the provision of liquidity to banks, which we can discuss today," Barr said. "Though I am skeptical that the Home Loan banks were integral to the Fed's emergency lending clunkiness last March."
The Fed set up its emergency liquidity spigot last spring to stem concerns and deposit outflows at large regional banks. That facility, the Bank Term Fund Program,
Rep. Bill Foster, D-Il., the ranking member of the subcommittee, also said that lawmakers should be careful to preserve the liquidity-providing role of the Federal Home Loan banks.
He said that the Federal Home Loan banks "provide key competitive advantages due to the smaller institutions that they serve.
"This I believe is one of the things where there is strong bipartisan concern about maintaining a healthy sized distribution in banks," he said.
American Banker
While some Democrats in the Senate, including Senate Banking Committee Chairman Sen. Sherrod Brown, D-Ohio, have questioned the Federal Home Loan banks' overseeing regulator, the Federal Housing Finance Agency, on the role of the Federal Home Loan banks in the regional banking crisis, including the system's high level of loans to institutions that failed, Foster said that it's a "huge advantage" for small businesses to have a variety of financial institutions of varying sizes bidding for their loans. The FHFA in October released the results of a long-awaited report outlining reforms to the Federal Home Loan banks,
"So having institutions like the FHLB system that level the playing field to some extent between the larger and smaller institutions is another key role that we shouldn't overlook," he said.
The American Bankers Association, which represents banks of varying sizes, sent the subcommittee a long list of changes that the group says would make the Fed's discount window and other facilities more effective. At minimum, for example, the discount window should be expanded to include West Coast business times.
The discount window, in some ways, should operate more like the temporary emergency facility the Fed set up in the wake of the Silicon Valley Bank failure, the group said.
"It is worth considering whether the stress of March 2023 could have been significantly lessened if SVB were able to borrow against the par, rather than current market value of its Treasury holdings, and without any collateral haircuts," ABA said in the letter to the subcommittee.
The Fed can also take steps to make borrowing from the discount window less stigmatized, ABA said. For example, banks that regularly test open lines should receive higher marks on some exams.
ABA also said that the banking agencies "appear to be considering new targeted requirements that banks pre-position a pool of collateral at the Federal Reserve."
"While the details are not yet public, this requirement raises critical policy issues, including how a new requirement would affect moral hazard, interact with deposit insurance or impact other entities, such as the Federal Home Loan banks, and more important, impact banks' availability to meet the credit and funding needs of US households and businesses," ABA said.
The group said that the "interplay between the Fed's discount window and the Federal Home Loan banks needs to be fully considered by Congress," as well as the FHFA and banking regulators.
"Under current statute the FHLBs provide banks with funding to meet day-to-day liquidity to support their lending and to achieve key housing goals across all market conditions," the groups said. "Moreover, the FHLBs offer smaller banks access to capital markets that would otherwise be unavailable or prohibitively expensive."
The Federal Home Loan banks are a "vital source of liquidity" for banks, and uncoordinated changes "could be very disruptive to banks and the broader economy," the ABA said.
Ryan Donovan, president of the Council of Federal Home Loan Banks, said in a letter to the subcommittee that any reforms "should recognize the importance of preserving both roles and both sources of financial support during a crisis," of the Federal Home Loan banks and the Fed.
"We recognize the Federal Reserve's role as the lender of last resort for banks and credit unions," he said in the letter. "However, during times of market instability the FHLBanks have traditionally played a critical role of the first responder for otherwise healthy members, including during the Great Financial Crisis, the early days of the COVID-19 pandemic, and throughout March 2023. As financial first responders, the liquidity we provide serves to stabilize the mortgage market and the broader financial system."
