Geographic ties bind Federal Home Loan banks and their members to local communities. The Federal Housing Finance Agency's recent proposal to change the FHLB membership requirements could put this connection at risk.
The Federal Home Loan Bank System is a national network of local cooperatives. Each of the 12 Federal Home Loan banks is as committed to its local region as the members it serves. The system aims to foster responsible lending and meet the needs of communities across the country. This is possible because the Home Loan banks and their members share a dedication to, and familiarity with, each region and its needs.
The FHFA's proposal would require that member banks hold at least 1% of their assets in mortgages. Critics have argued that this condition would hurt community banks and credit unions. But the definition of what constitutes a lender's "principal place of business" is another area of the draft regulation that could inadvertently jeopardize the integrity of the system.
A lender's principal place of business determines which of the 12 Home Loan banks it can join as a member. The FHFA's proposal aims to "clarify the standards by which an insurance company's 'principal place of business' is to be identified in determining the appropriate bank district for membership."
This is a noble effort, and much of what the document goes on to propose with regards to this matter would ensure that the geographical nature of the FHLB system would remain intact. But the language of the FHFA's proposal could put geographic ties at risk. The proposal currently states:
"In the case of an insurance company that maintains no physical offices of its own and has no employees of its own, or whose senior officers are situated at multiple locations, a bank shall designate the state of domicile as the principal place of business for the insurance company."
If adopted as written, the language would permit insurance companies — including "captive" insurance companies that various institutions can use as vehicles to access the FHLB system-to apply for membership in any FHLB district. This would affect the geographic nature of the system.
It is clear that this is not the FHFA's intent. In fact, much of what the document goes on to propose with regards to this matter would ensure that the geographic nature of the system would remain intact. But that language, as currently written, creates a loophole big enough to allow institutions to jump from one FHLB to another with relative ease. This should not be allowed to happen.
There is much within the FHFA's proposal that should be embraced. However, the principal place of business language should be enhanced in order to protect the local focus of the FHLBs' 82-year history and a system that has been a source of stability for our nation's economy throughout its entire life.
Joseph Ficalora is president and chief executive of New York Community Bancorp.