As the "third" housing GSE, the Federal Home Loan Bank System also is slated for downsizing under the Obama administration's plan for restructuring the residential finance system.
According to the reform proposals released by the Treasury and HUD, the 12 regional FHLBs would focus their mission on serving their small and medium-sized member banks, credit unions, and insurance companies.
Large interstate and nationwide banks would be limited to being an "active member" of only one FHLB. Currently, a megabank is eligible for membership in every FHLB district where it conducts business.
"We also support limiting the level of advances, which would only have an impact on large financial institutions that can access capital markets already," according to the joint 'Reforming America's Housing Finance Market' report.
The Council of Federal Home Loan Banks warned the limitation on membership would "concentrate risk" within a few FHLBs. The current regional network of member-owned cooperatives helps to "distribute and manage risk across geographic boundaries," said council president and chief executive John von Seggern.
The Council also took issue with the proposal on limiting FHLB advances made to large banks. Von Seggern said small, medium and large member institutions used FHLBs advances (loans) to weather the 2008 financial crisis that brought down Lehman Brothers as well as Fannie Mae and Freddie Mac.
"The system performed well during the crisis -- not perfectly but on average well," said Bob Davis, executive vice president of the American Bankers Association. "Our focus is to do no harm to the Federal Home Loan Bank System," Davis told National Mortgage News.
