CUNA Regulatory Comment Call
October 19, 2001
Federal Housing Finance Board Solicits Comments on Multiple Federal Home Loan Bank Memberships
(NOT A MAJOR RULE)EXECUTIVE SUMMARY
- The Federal Housing Finance Board (FHFB) is soliciting comments on whether financial institutions should be permitted to join more than one Federal Home Loan Bank (FHLBank) at the same time.
- The Federal Home Loan Bank Act (Bank Act) allows a financial institution to join different FHLBanks, but it is unclear whether an institution can join more than one FHLBank at the same time.
- This is not a proposed rule. The FHFB is soliciting comments as a result of petitions from three FHLBanks requesting that the FHFB permit a financial institution to join more than one FHLBank at the same time. The FHFB will review the comments received and then decide whether and how to proceed further on this issue.
- The comment period has been extended until March 4, 2002. Please submit your comments to CUNA by February 25, 2002.
Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Assistant General Counsel Jeffrey Bloch at jbloch@cuna.com; or mail them to Mary or Jeff in c/o CUNA's Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building - 6th Floor, Washington, DC 20004. Please contact us if you need more information. You may also contact us if you would like a copy of the proposal or you may access it on the Internet at the following address: http://www.fhfb.gov/PressRoom/petitions/Solicitation092601.htm
BACKGROUND
The Federal Home Loan Bank System was created in 1932 by the Bank Act. This resulted in the creation of twelve FHLBanks, which are central credit facilities for financial institutions and are available to credit unions. Each FHLBank is located in a separate geographic district and serves the financial institutions within that district that are members. The FHLBank system is designed to be a cooperative in that only members may borrow from the FHLBank. All FHLBank profits are distributed back to the members in the form of lower loan rates or through dividends on the FHLBank shares that are required to be purchased by the financial institution as a condition for membership.
Financial institutions are generally members of the district in which the institution’s principal place of business is located. The Bank Act does permit an institution to become a member of the adjoining district “if demanded by convenience and then only with the approval of the [Finance] Board.” It has been the subject of interpretation as to whether this permits an institution to join more than one FHLBank at the same time or whether this only permits the alternative of joining the FHLBank in an adjoining district.
Currently, each member financial institution is a member of the FHLBank in the district in which the member maintains its principal place of business. No financial institution is a member of more than one district, although certain holding companies do own separate subsidiaries that are members of different FHLBanks.
The recent consolidation in the banking industry has affected the FHLBank system. Most FHLBanks have one or two members that are disproportionately large. It is possible that these members may be able to achieve price or other concessions from their FHLBank. However, the cooperative structure of the system, in which concessions lowers the profits that are shared by all the members, and the FHLBank directors’ duty to treat all members fairly are factors that mitigate against this possibility.
Another concern regarding these large members is the additional credit risk that is posed by large members that account for a significant portion of the activities at a FHLBank. This subjects the FHLBank to significant losses if one of these members experiences financial difficulties. Again, this risk is mitigated because advances from FHLBs are secured by collateral and because the liabilities of a FHLBank are backed by the capital of the entire FHLBank system.
The concessions and concerns described above may also raise safety and soundness concerns regarding the financial condition of the FHLBank. The FHFB enforces these safety and soundness requirements through annual on-site examination and off-site monitoring.
FHFB PROPOSAL
The FHFB’s solicitation for comments regarding multiple FHLBank memberships is a result of petitions from three FHLBanks requesting that the FHFB allow a financial institution to join more than one FHLBank. This would interpret the Bank Act, which allows financial institutions to join the FHLBank of an adjoining district, in a manner such that the institution may be allowed to join more than one FHLBank concurrently, as opposed to having to choose which FHLBank to join. As required by the Bank Act, the additional membership would have to be approved by the FHFB and the financial institution would also have to demonstrate that this additional membership is “demanded by convenience.”
Allowing additional memberships is likely to increase competition among the FHLBanks. Allowing multiple memberships may also provide more stability for FHLBanks by alleviating the current concentration of risk that arises when one or two financial institutions become disproportionately large members of a single FHLBank. For small institutions such as credit unions, the increased competition may yield better terms and rates and other benefits for the large institutions that may not be available for credit unions, although there are safeguards, as described above, that may mitigate this problem. However, all members of a FHLBank, including credit unions, may benefit by the alleviation of the concentration risk because this may improve the financial condition of the FHLBanks.
The number of additional FHLBanks that a financial institution may join would depend on how many districts border the one that includes the institution’s primary place of business. This disparity may place some financial institutions and FHLBanks at a relative disadvantage to others. The FHFB is considering limiting the number of FHLBank memberships as a means to address this possible disparity.
Here are other issues that would need to be addressed if multiple memberships are permitted:
- Each member is required to subscribe to FHLBank stock as a condition of membership. The FHFB will analyze how to apply this requirement for financial institutions that are members or more than one FHLBank.
- The Bank Act provides that a security interest granted by a member to a FHLBank is generally entitled to priority, except for those that are entitled to priority under other law. The issue here is how a FHLBank would achieve priority if a member has advances from another FHLBank. This is an issue because FHLBanks generally have a “blanket lien” on all of the member’s assets. Possible solutions would be for members to give priority to specific assets or for FHLBanks to agree on a procedure on how and when to subordinate their interests.
- FHLBank members vote for FHLBank directors. Officers and directors of member financial institutions are eligible to serve as FHLBank directors. For those institutions with multiple membership, the issue here is the extent that these institutions should be able to participate in the election of directors in more that one district. If members could participate in the election in more than one district, small financial institutions, such as credit unions, would be disadvantaged because their vote would be diluted if a financial institution becomes a member of an additional district that includes credit unions.
QUESTIONS TO CONSIDER REGARDING THE FHFB’s PROPOSAL REGARDING MULTIPLE FEDERAL HOME LOAN BANK MEMBERSHIPS
- Has the current concentration of one or two large financial institutions in each FHLBank district adversely affected your ability to access FHLBank services? If so, how?
- Currently, financial institution holding companies can achieve multiple FHLBank memberships when their subsidiaries join different FHLBank districts. Has this resulted in competition among FHLBanks to provide better services to these large institutions to the degree that it has affected your ability to achieve similar levels of service at a similar price?
- Do you support the proposal to allow financial institutions to join more than one FHLBank? Would the possible benefit of decreasing the concentration of risk by allowing multiple memberships outweigh the possible disadvantage of a lower level of service for credit unions that may result from competition among FHLBanks to provide services to the larger institutions?
- The Bank Act allows for membership in an adjoining FHLBank district if “demanded by convenience.” What factors should a financial institution show in order to meet this standard?
- The number of additional FHLBanks that a financial institution may join would depend on how many districts border the one that includes the institution’s primary place of business. Should there be limits on the number of districts that a financial institution may join in order to eliminate this possible disparity? What other restrictions or limitations should be imposed on financial institutions that request memberships in multiple FHLBank districts?
- Would multiple memberships adversely affect the security interests that the FHLBank would have on advances made to the members since there is the issue as to whether priority rights can be maintained if a member has advances from more than one district? Does this present an undue risk to the FHLBank system?
- If a financial institution becomes a member of more than one FHLBank district, should that institution be allowed to participate in the elections of the directors in these adjoining districts? Are you concerned that this would dilute the voting power of credit unions that are in those adjoining districts?
- Other comments?
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Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com |
