Editor’s note: This column was included in the May 9 version of The Pulse, a weekly BankBeat email newsletter sent to subscribers.
The current interest rate environment is making it difficult to attract and/or retain deposits, so liquidity is top of mind for many community bankers. What a worrisome time for the Federal Housing Finance Agency to be considering major changes to the Federal Home Loan Banks, a major source of lender liquidity.
Almost two years ago, the FHFA launched a major effort to update the Federal Home Loan Bank system, which was created in 1932. Last November, the regulator outlined its reform effort in a 142-page report called FHLBank System at 100: Focusing on the Future. I had the opportunity last week to hear FHLB-Des Moines President Kris Williams summarize the report.
The report contains several recommendations; Williams called attention to five: 1) requiring members to devote at least 10 percent of their assets to housing, rather than simply meeting that threshold upon membership application; 2) limiting large debt issuances; 3) strengthening risk management and credit worthiness evaluation; 4) revising the definition of long-term advances to anything over one year as opposed to the current five years; and 5) changing the minimum Affordable Housing Program contribution, presumably to more than the current 10 percent.
Timing and details of recommendations are to be determined, but Williams is calling for vigilance because changes may make it more difficult for some banks to use FHLB advances as they have in the past. Some current members, particularly those in rural areas, may not be able to maintain a loan portfolio that includes 10 percent housing. And if strengthening evaluations means more frequent examinations or tighter supervision, it will certainly add costs to the system. And while plowing more money into AHP grants might be nice politically, it won’t do anything to alleviate a real housing crisis in this country; the need far exceeds the net income of the entire FHLB system.
More than money in the vault, liquidity planning these days means access to lenders — like the FHLB system — that can provide credit quickly in the event of a spike in customer withdrawals. This is not the time to be tinkering with the system that may make it less reliable for community banks, who supply such a large portion of small business and personal credit. As the details of proposed changes to the FHLBanks emerge, review them carefully and speak up if you believe they will impede the ability of your bank to meet the needs of your customers.
Tom Bengtson
Publisher
BankBeat