I want to thank Senator Hagel for introducing this bill and giving the Committee an opportunity to discuss many important issues associated with the Federal Home Loan Bank (FHLB) System. Before discussing how to "modernize" the FHLB System, however, I think it is important to review the goals and objectives of the FHLB System.
The FHLB System was established by Congress in 1932 to provide a stable source of readily available, low-cost funds to residential mortgage lenders. There are 12 district FHLBs around the country. One of the 12 banks is located in my home state of California-- the Federal Home Loan Bank of San Francisco (FHLBSF).
The FHLBSF, which includes institutions headquartered in Arizona, California and Nevada, provides grants and subsidized loans to create affordable rental and home ownership opportunities. The Bank promotes housing and home ownership by expanding the supply and reducing the cost of mortgage credit. With more than $56 billion in assets, the FHLBSF is the largest of the 12 banks in the FHLB System.
So while I am pleased that the bill before us addresses some of the fundamental issues associated with the FHLB System, and I will discuss three of those issues in particular, I also think it is important to ensure that the original mission of the FHLB System is retained. FHLBs have provided countless families around the country access to mortgage credit.
Now let me turn to the one provision of this bill in which I am particularly interested-- the REFCorp payment.
I believe the changes the bill makes to the Resolution Funding Corporation (REFCorp) payment are necessary and appropriate. This is an issue on which I have been working over the past few years. When the Economic Growth and Regulatory Paperwork Reduction Act of 1995 was considered by this Committee, I sought to have an amendment included which would have modified the Federal Home Loan Bank Act to more equitably allocate the annual payments made by the FHLBs to the REFCorp. Unfortunately, my efforts at that time were unsuccessful.
The $3 00 million payment to REFCorp is not distributed proportionately among the FHLB s. Under current rules, each FHLB must contribute 20 percent of its net income to the REFCorp payment. The aggregate of these payments has always been less than $300 million, thereby creating a shortfall. This shortfall is allocated among the banks in proportion to each FHLB's share of the average advances made to members insured by the Savings Association Insurance Fund (SAIF). Thus, a FHLB whose membership is dominated by institutions insured by the Bank Insurance Fund (BIF), is assessed a much lower percentage for its REFCorp shortfall payment than a bank whose members tend to be SAIF insured.
In 1996, the FHLBSF was required to pay 27 percent of the shortfall, even though its average capital and income represented only 18 percent and 16 percent of total capital and income, respectively, of the 12 FHLBs. In 1992, the FHLB of Boston was assessed 24 percent of its net income for the REFCorp payment while the FHLBSF was assessed 57 percent of its net income. The Congressional Budget Office concluded in a 1993 study that the disparity of the REFCorp payment "introduces some perverse incentives into the FHLB System." The current formula discourages lending to a segment of the System's membership- SAIF insured institutions- and encourages the FHLBs to increase their investments since investment income is not taxed under the shortfall formula.
The payment formula proposed in this bill is fair and equitable to all of the FHLBs. Each of the 12 banks would pay 20.75 percent of its annual earnings to fund their share of the REFCorp obligation. The CBO has scored this change as budget neutral and has even projected that this change will generate an additional $45 million over 5 years. Thus, reducing the share the Treasury currently pays on REFCorp bonds.
Two other provisions of this bill are also particularly appropriate when discussing
modernizing the FHLB System. Provisions on the voluntary membership and on capital structure.
The FHLBSF strongly support those provisions and I hope that any bill to modernize the FHLB
System would contain those provisions in addition to the REFCorp provision.
Home | Menu | Links | Info | Chairman's Page