Sandra Thompson, former head of bank supervision at the Federal Deposit Insurance Corp. and now head of the Federal Housing Finance Agency, is calling for major changes at the $1 trillion-asset Federal Home Loan Bank System she oversees.
A review of the Home Loan banks began last year, Thompson said, after she read an open letter in the American Banker by two advocates for reform (and the authors of this article), Cornelius Hurley, from Boston University School of Law and a former director of the Federal Home Loan Bank of Boston, and former FDIC Chairman William Isaac. Hurley, who has been a vocal critic of the Federal Home Loan Bank System, asked Thompson during a "fireside chat" at the Brookings event whether the regulator considers taxpayers to be stakeholders in the system. Thompson responded "absolutely" because the debt issued by the Home Loan banks comes with an "implied" government guarantee.
It should also be noted that loans to member banks of the system are deemed senior to the FDIC and other creditors whenever a Home Loan member bank fails. In addition, Thompson observed, Home Loan banks enjoy tax privileges. They themselves are exempt from paying any taxes, both state and federal. Plus, the interest on their debt instruments is tax-exempt.
Thompson added that the system does serve a much-needed purpose by providing liquidity to community banks, but she said that much more could be done to address the needs of "underserved, rural and tribal communities." The policy discussion has shifted from a narrow focus on expanding membership in the system to a much broader consideration of the system's mission. "What are the products and services that could be offered in a meaningful way?" Thompson asked.
The Federal Home Loan Bank System was founded in 1932 as a government-sponsored enterprise to support mortgage lending at the nadir of the Great Depression. During and after the financial crisis of the late 1970s and through the early 1990s, major upheavals in the financial markets pretty much destroyed the savings and loan industry, causing a substantial amount of mortgage lending to move outside FDIC-insured institutions. This in turn significantly altered the role of the Home Loan Bank System. It has become solely a source of liquidity for commercial banks and large insurance companies, something that was not intended by Congress.
Certainly, it was never intended to be a backup source of liquidity for high-risk ventures such as crypto assets. Sadly, this is what the Home Loan banks' reach for profits has led to, as demonstrated by the crypto scandal now engulfing the system.
The authors of this article do not advocate abolishment of the Home Loan Bank System. We believe strongly that it is time to repurpose the system by broadening its mission beyond housing to include other types of affordable lending. We also believe that the Federal Home Loan Bank System should not attempt to replicate the role of the Federal Reserve System as "lender of last resort" to the banking system. That role has traditionally been the province of private correspondent banks and the Fed in coordination with the FDIC, where it should remain. We also believe strongly that the Home Loan Bank System should never be a senior lender to the Fed and FDIC.
Thompson faces huge political obstacles in reforming this nearly century-old bureaucracy. But the path she has chartered is the right one, and she is the right person to oversee this most important project.
