Good Morning and welcome to our witnesses. I would like to begin my statement by thanking Chairman D'Amato for calling this hearing.
Not since 1989 has significant Federal Home Loan Bank legislation passed. While the system is working well, I believe Congress can make improvements and updates to a system that was originally created to serve only the thrift community. The membership of the system has changed, and today a substantial majority of members are commercial banks. However, mandatory members continue to hold a significant portion of the System's stock. I believe it is time to make some needed improvements that recognize these changes and equalize membership rules. S. 1423, the Federal Home Loan Bank System Modernization Act of 1997 accomplishes these objectives. I am grateful to my colleagues Senators Bennett, Grams, and Kerrey for cosponsoring this legislation.
The need for additional credit in rural America is well documented. Just last year, The Rural Policy Research Institute, The Department of Agriculture, the General Accounting Office, and the Kansas City Federal Reserve Bank each published studies and/or conference proceedings highlighting credit availability in rural America. The Senate Agriculture Committee held a hearing last fall which highlighted rural credit needs and several options available to solve these problems.
During the 1980s in my state of Nebraska - as in much of America - many community banks and thrifts closed. As local credit dried up, local economies stagnated. Small businesses, our greatest engines for job growth, were the first to feel the crunch. By ensuring the viability of the community bank and thrift, the Federal Home Loan Banks can keep credit flowing to small businesses, farmers, and potential homeowners - and help our local communities thrive as we enter the 21st Century.
Credit flows in rural America have unique challenges. First, banks and thrifts are competing for deposits with brokerage firms and mutual funds -- and the local institutions are losing. This means that deposits that used to go to local institutions and were used for local lending are now going to major financial institutions outside the community.
Second, we have an aging population in many rural communities. When a farmer dies, his inheritance goes to his children - who often have left the community. That means money flows out of the community -- out of local financial institutions -- and is no longer available for local economic development.
These two factors mean less deposits in local banks. This is where the Federal Home Loan Banks can make a real difference. The Federal Home Loan Banks can be a critical source of liquidity for community banks and thrifts. For many smaller institutions the Federal Home Loan Bank System provides their only real access to the capital markets. I tend to focus on rural America because that is where I come from - but liquidity problems can be equally serious in urban areas. The Federal Home Loan Banks are an important tool for providing credit to consumers no matter where they live.
S. 1423 proposes to allow financial institutions with assets less than $500 million to access the Federal Home Loan Bank System for new kinds of lending. For those who are concerned that this is a massive expansion let me put it in perspective: advances of the Federal Home Loan Banks to these smaller institutions represent only 14% of outstanding advances. In other words, this is at best a modest expansion. For those worried about the bill's current collateral definitions I want you to know that I am willing to work to tighten those definitions.
The other main components that are of equal importance are: providing voluntary membership, reforming the capital structure of the Federal Home Loan Bank System, changing the REFCorp formula to a fixed percentage, and giving the FHLBanks authority to run all of the day-to-day operations of their Banks. S. 1423 represents a balance between those advocating small changes to the System and those pushing for sweeping reform. The changes contained in S. 1423 are necessary for a more efficient, safe and sound System, nothing more.
S. 1423 is supported by ten of the twelve FHLBanks. I would like to enter into the record a letter of support from the Council of Federal Home Loan Banks and a letter from America's Community Bankers. I appreciate their support.
Before we proceed I would like to ask my colleagues indulgence on an issue. While Mr. Drabenstott is not here today on behalf of the Federal Reserve System or even the Kansas City Bank, I have agreed to limit my questions for Mr. Drabenstott to his area of expertise: rural credit. Because of his position with the Kansas City Federal Reserve it would be inappropriate for him to be forced to answer questions dealing with specific legislation where the Fed has not taken a formal position.
I look forward to hearing the witnesses testimony.
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