[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
A REVIEW OF THE FEDERAL
HOME LOAN BANK SYSTEM
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE, AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 7, 2006
__________
Printed for the use of the Committee on Financial Services
Serial No. 109-117
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31-546 PDF WASHINGTON : 2007
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair DARLENE HOOLEY, Oregon
RON PAUL, Texas JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio BRAD SHERMAN, California
JIM RYUN, Kansas GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio BARBARA LEE, California
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut JOSEPH CROWLEY, New York
VITO FOSSELLA, New York WM. LACY CLAY, Missouri
GARY G. MILLER, California STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota JOE BACA, California
TOM FEENEY, Florida JIM MATHESON, Utah
JEB HENSARLING, Texas STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida AL GREEN, Texas
RICK RENZI, Arizona EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin,
TOM PRICE, Georgia
MICHAEL G. FITZPATRICK, BERNARD SANDERS, Vermont
Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
JOHN CAMPBELL, California
Robert U. Foster, III, Staff Director
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises
RICHARD H. BAKER, Louisiana, Chairman
JIM RYUN, Kansas, Vice Chair PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware GREGORY W. MEEKS, New York
PETER T. KING, New York DENNIS MOORE, Kansas
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
DONALD A. MANZULLO, Illinois HAROLD E. FORD, Jr., Tennessee
EDWARD R. ROYCE, California RUBEN HINOJOSA, Texas
SUE W. KELLY, New York JOSEPH CROWLEY, New York
ROBERT W. NEY, Ohio STEVE ISRAEL, New York
VITO FOSSELLA, New York, WM. LACY CLAY, Missouri
JUDY BIGGERT, Illinois CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MARK R. KENNEDY, Minnesota JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
J. GRESHAM BARRETT, South Carolina BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
TOM FEENEY, Florida NYDIA M. VELAZQUEZ, New York
JIM GERLACH, Pennsylvania MELVIN L. WATT, North Carolina
KATHERINE HARRIS, Florida ARTUR DAVIS, Alabama
JEB HENSARLING, Texas MELISSA L. BEAN, Illinois
RICK RENZI, Arizona DEBBIE WASSERMAN SCHULTZ, Florida
GEOFF DAVIS, Kentucky BARNEY FRANK, Massachusetts
MICHAEL G. FITZPATRICK,
Pennsylvania
JOHN CAMPBELL, California
MICHAEL G. OXLEY, Ohio
C O N T E N T S
----------
Page
Hearing held on:
September 7, 2006............................................ 1
Appendix:
September 7, 2006............................................ 25
WITNESSES
Thursday, September 7, 2006
Rosenfeld, Ronald A., Chairman, Federal Housing Finance Board.... 12
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 26
Baca, Hon. Joe............................................... 28
Clay, Hon. Wm. Lacy.......................................... 29
Hinojosa, Hon. Ruben......................................... 31
Kanjorski, Hon. Paul E....................................... 32
Royce, Hon. Ed............................................... 34
Rosenfeld, Ronald A.......................................... 36
Additional Material Submitted for the Record
Hon. Barney Frank:
Letter to the Federal Housing Finance Board.................. 56
Standard & Poors study: FHFB Proposed Retained Earnings
Regulation Poses Challenges for FHLBs...................... 58
A REVIEW OF THE FEDERAL
HOME LOAN BANK SYSTEM
----------
Thursday, September 7, 2006
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:03 a.m., in
Rayburn House Office Building, Hon. Richard H. Baker [chairman
of the subcommittee] presiding.
Present: Representatives Baker, Castle, Manzullo, Royce,
Kelly, Biggert, Tiberi, Hensarling, Davis of Kentucky,
Campbell, Kanjorski, Hooley, Moore of Kansas, Hinojosa, Clay,
Baca, and Scott.
Ex officio: Representatives Oxley and Frank.
Chairman Baker. I would like to call the hearing to order.
The committee meets today to review the status of the Federal
Home Loan Banks, and their regulatory regime, and the Federal
Housing Finance Board, including the latest significant
developments within the Federal Home Loan Bank system.
I am pleased that Chairman Ronald Rosenfeld is our single
witness for today's hearing. The bank system was established in
1932 to provide liquidity to savings and loan associations
which were the primary home mortgage lenders in that period.
The Bank System today encompasses 12 regional Federal Home Loan
Banks, patterned on the structure of the Federal Reserve
System. Each is a member-owned cooperative.
Like the other housing government-sponsored enterprises,
Fannie Mae and Freddie Mac, Congress granted the Bank System
special privileges as part of their governmental charter. Those
privileges include exemption of the Banks' corporate earnings
from Federal, State, and local taxes, and the status of debt
issues as government securities for the purpose of compliance
with securities law.
The Bank System has enjoyed significant growth, roughly to
the same size as our competitors, Fannie Mae and Freddie Mac.
As of June 30, 2006, the System's assets were $1 trillion, of
which $638 billion were advances to members. The System has
outstanding debt obligations of $940 billion.
In recent years, Federal Home Loan Banks have established
and participated in what is known as a mortgage purchase
program, whereby credit and interest rate risk are shared
between member institutions that originate the loan and the
bank purchasing the loan.
Accordingly, in light of the growth and programmatic
changes, review of their regulatory requirements is not only
appropriate, but necessary. This committee has engaged in
significant review and oversight of Fannie Mae and Freddie Mac
throughout the years, but we have not as frequently examined
the structure or requirements of the Federal Home Loan Bank
System.
Today, we shall hear comment, I am certain, from members
with regard to a rule now pending, as proposed by the chairman,
some of whom will express concern about the proposal. I want to
express my appreciation to the chairman for his principled hard
work, and to his examination staff for the frequency of the
examinations which they perform.
I recognize that the purpose of this work is not simply to
artificially constrain the Bank System, but to ensure that
there are adequate protections in place for the taxpayer, who
ultimately would be found responsible for failures of a
significant nature within the system.
However, I want to make clear that the pending rule
revision and the actions taken are really interim steps, in
that this committee has passed, and the House has passed, H.R.
1461, which provides for the creation of a unified housing
regulator for Fannie Mae, Freddie Mac, and the Federal Home
Loan Banks. I continue to be troubled that there are disparate
rules governing the practices of each, not only capital
requirements but business conduct as well.
Some criticism has been leveled at H.R. 1461 for its
failure to address the issue of portfolio constraint, and I
wish to make clear on behalf of the committee one more time
that the bill makes express provision that the new director
created by the Act shall examine and report to the Congress on
the appropriate constraints, and the methodology to impose such
constraints, in order to effect the leveraging of portfolio for
shareholder profit, as opposed to the compliance of charter
requirements.
Stated another way, when asking Secretary Snow just last
year whether the portfolio should be constrained to a dollar
certain, or did he have in mind a particular formula to which
reduction would be applied, he suggested to the committee that
there should not be a dollar certain reduction, nor did he have
in mind a formula by which portfolios should be reduced.
But rather, that should be the subject of study of
professional staff, and recommendations to the Congress in
order to assure that we did not royal the housing markets
unnecessarily. That's exactly what H.R. 1461 does.
More importantly, whether there is a difference between
House and Senate language over the regulatory details of GSE
governance, I think it extraordinarily important that while we
still have stability in the housing market, and while we still
enjoy relatively flat interest rates, that the Senate at least
act on a GSE proposal.
Without doubt, there will be a conference committee. We
have come too far, worked too hard, and have two proposals--
each of which has their own validity--to let this legislative
opportunity pass us by. And so, I would hope and urge that the
Senate would act before our final adjournment, perhaps late
November, early December, with the adoption of some form of GSE
proposal.
If we were able to do so, perhaps it would be of assistance
to the current Federal Home Loan Bank regulators in the matter
now pending. Knowing that the goals they are trying to reach,
the patterns that they establish with their regulatory
construct, would be of great benefit in going forward, with the
creation of the new consolidated GSE regulator. So, I am
appreciative of Chairman Rosenfeld's bold leadership, and I
commend him and his staff for his good work, and look forward
to his statement at the appropriate time.
Mr. Kanjorski?
Mr. Kanjorski. Mr. Chairman, we meet this morning to once
again examine the Federal Home Loan Bank System. As you already
know, I share your deep interest in these important financial
institutions. After all, we worked closely together for several
years to include language to improve the system during our
lengthy deliberations over H.R. 10, the landmark law to
modernize the financial services industry.
Perhaps most importantly, our joint efforts in 1999
resulted in a much needed update of the capital structure in
each of the Federal Home Loan Banks. Until we acted on these
matters, these financial institutions had operated under
antiquated subscription capital rules created 67 years earlier,
in 1932.
Specifically, the law now requires each Federal Home Loan
Bank to submit a plan to the Federal Housing Finance Board for
approval that is best suited for the condition and operation of
the bank and the interests of its members. Since we completed
our legislative work, all but one of the Federal Home Loan
Banks have received approval from the Finance Board to put in
place a revised capital structure.
A regulatory proposal put forth earlier this year by the
Finance Board, however, now threatens to slow the progress
being made to implement these statutorily required capital
reforms. Specifically, this proposal would impose inflexible
minimum retained earnings levels at each bank. This proposal
has generated an extensive policy debate.
Ultimately, the Finance Board received 1,066 letters on its
rulemaking plan. Less than one half of one percent of the
commentators, as I understand, supported the regulatory change.
Some of the key arguments raised against the plan include that
it could result in a decision to engage in higher risk
activities and that it could undermine the housing mission of
the system. Standard & Poors has also observed that the
proposal may ``reduce the financial flexibility'' of a bank to
manage its capital positions and lessen the attractiveness of
membership in the system.
While I share these apprehensions, I am most concerned
about the failure of the Finance Board to conform this
regulatory proposal to the specific capital statutory
requirements outlined in H.R. 10. This plan would impose a
uniform retained earnings requirement that every bank must
adopt, regardless of its preferences.
While the law mentions retained earnings as one source of
capital, it does not mandate that a bank hold a specific
minimum level. In fact, as I noted in my remarks on the
conference report on H.R. 10, our goal was to create ``a
flexible capital structure.''
In a recent letter sent to Chairman Oxley and Ranking
Member Frank, today's witness suggested the Finance Board's
proposed capital revisions ``satisfies the intent'' of H.R. 10.
As an author of these provisions, I must take exception to this
conclusion. Our intent in updating the capital structures used
at each of the banks was not only to create a more permanent
capital system, but also to provide maximum flexibility to each
of the banks to develop their own capital structures to address
their own special needs.
Because the retained earnings proposal decreased such
flexibility, it is inconsistent with the language of the law
and the legislative history. In my Floor statement on H.R. 10,
I also noted that I had worked to ensure that we ``would not
place small financial institutions at a competitive
disadvantage.'' This regulatory proposal, in my view, would
undercut our hard work to achieve that important objective.
A study of the Stanford Washington Research Group found
that the proposal would disproportionately affect smaller
publicly traded financial institutions. These entities would
not only experience decreases in dividend income during the
transition period, but unlike large financial institutions,
they would also be unable to tap into our capital markets via
other financing mechanisms.
Beyond my strong reservations about this recent rulemaking
proposal, I continue to be concerned about the failure of the
Finance Board to follow the clear statutory mandate regarding
the appointment of public interest directors.
Section 7 of the Federal Home Loan Bank Act indicates that
at least six directors on each bank board ``shall be
appointed'' by the regulator. As you know, Mr. Chairman, I have
a very strong interest in ensuring that the Federal Home Loan
Banks benefit from an independent public voice on their boards.
Inexplicably, at least 70 percent of the public interest
director positions are currently vacant. If the Finance Board
fails to act on these matters by the end of the year, there
will be no public interest directors at any Federal Home Loan
Bank, and 40 percent of all board positions will be vacant.
These vacancies occur at a time when the system is
addressing increasingly complex issues. They also create
corporate governance problems, in terms of workload of the
remaining elected directors, institutional memory of the board,
and ensuring that the Federal Home Loan Bank adheres to the
system's mission to promote affordable housing and advance
economic development.
Before I close, Mr. Chairman, let me make a point to our
witness. I seem to detect that there must be a signing
statement written by the President when he signed H.R. 10--not
this President, but the previous President--that exempted the
President and this board from this law, because it seems to me
the Finance Board is acting in direct contradiction of the law
as enacted by the Congress. And I find that incredible, but
rather consistent with this President's intent.
And I think it is very important that the Finance Board
explain to this committee why you think that the action of
Congress should be absolutely ignored, and that 40 percent of
the members of the boards of directors of this huge institution
involving billions of dollars, and with the support of the
taxpayers' money behind it, should go improperly governed. So,
I look forward to hearing that answer.
In closing, Mr. Chairman, I have deep reservations about
the retained earnings rulemaking as proposed by the Finance
Board. I also have great apprehension about the continued
failure of the Finance Board to appoint public interest
directors. I, therefore, hope our witness today will
forthrightly inform us about what he is doing to resolve these
problems.
Chairman Baker. I thank the gentleman for his statement. I
now recognize Chairman Oxley. I don't know with certainty
whether the committee will meet again in this session on the
matter of GSE governance. So, accordingly, I want to express my
appreciation to the chairman for his long-standing work on the
creation and adoption of H.R. 1461, the House-posed position on
GSE governance.
It is clear to me that we wouldn't be where we are today--
although we haven't crossed the goal line--without your hard
work and commitment to that purpose. So I thank the chairman
for his good work, and recognize him for such time as he may
consume.
The Chairman. I thank Chairman Baker for those words, and
would certainly echo his remarks regarding GSE reform. The
package that we passed in this committee, and on the House
Floor by a large bipartisan vote, is indicative of the hard
work you have done over a number of years--in many cases, all
by yourself--and it would be a shame to come this far, and not
put that across the goal line and get a Presidential signature
on it, in light of all of the revelations that have come out on
the GSE's.
It truly provides an opportunity for the Congress to put
its imprint on a very important piece of legislation that you
have worked on for so long. So anything we can do to that end
would be appreciated.
Let me welcome Chairman Rosenfeld. It is good to have you
with us, and thank you for the job that you are doing. We
thought it was important to have you here to discuss some of
the issues that were raised in the remarks by the gentleman
from Pennsylvania, as well as the gentleman from Louisiana.
The Federal Home Loan Bank System has been critical to the
country in creating a liquid residential mortgage market. The
Bank System also plays an important role in small business
financing and the funding of affordable housing and community
investment programs.
From a Congressional standpoint, ensuring the safety and
soundness and mission performance of the Federal Home Loan
Banks has never been more important. I want to thank Chairman
Baker for holding this hearing, and for his continued strong
oversight of the housing GSE's and their regulators.
The Finance Board required the Federal Home Loan Banks to
register their stock with the Securities and Exchange
Commission, in the belief that greater public disclosures would
be beneficial. I am interested in the status of that
registration, the process, and related accounting reviews.
Sound corporate governance is critical to the function of any
enterprise, as we found out recently.
In this regard, I am concerned that the Home Loan Banks do
not have full boards of directors. I would like to know why
there has been a delay in appointing public interest directors,
and what reforms to this process, Chairman Rosenfeld, that you
might support. Again, I echo the comments of the gentleman from
Pennsylvania in that regard.
The Finance Board has issued a proposed rule prescribing a
minimum amount of retained earnings for each bank, and limiting
the amount of excess stock that a bank can have. As Mr. Frank
and I stated in a recent letter to you, Chairman Rosenfeld, the
potential impact of this proposal is vitally important to the
banks, to their members, and to the housing finance system.
We are concerned that the proposed changes may go too far,
and actually harm the bank system more than protect it. And I
appreciated your response, that the Finance Board is taking an
open minded and cautious approach to this rulemaking, and that
any further actions will take into account the consequences for
the banks and their members. I look forward to an exchange of
views today on this important subject. And indeed, this is how
the process works, in terms of our oversight responsibilities,
as well as your responsibilities as chairman.
To that end, clearly the inclusion of the Federal Home Loan
Banks in the overall GSE legislation was timely and important,
and I want to say to the Federal Home Loan Banks in general
thanks for your cooperation in this. I know it wasn't easy, but
it clearly made eminently good sense to include the Federal
Home Loan Banks under this legislation.
Once we were able to work out the difficulties, which are
always inherent in the legislative process, I think the Home
Loan Banks are well positioned in this proposal. This is
another reason, Mr. Chairman, why we need to get this bill
across the goal line to the President's signature this year,
before we adjourn. And to that end, we again pledge our best
efforts. With that, I yield back.
Chairman Baker. I thank the chairman. And recognizing
Ranking Member Frank, I also want to express to him my
appreciation for his courtesies in working with us and moving
forward on H.R. 1461, and express my hope that we are able to
continue that good work, and get to conference before the year
is out. And with that, I recognize the gentleman for such time
as he may consume.
Mr. Frank. I appreciate the chairman's good words, and I do
want to--I think we work well together, and I hope we can
continue and not give up on this. And I do want to say, in
particular, I'm not used to being thanked for my courtesy, so
I'm especially grateful for that.
[Laughter]
Chairman Baker. It was particularly notable to me, so I
wanted to make sure I did it.
Mr. Frank. That's right. Okay. I think, with whatever
intentions, Mr. Rosenfeld, you have made a great mistake. And I
hope that we can hold off on this.
The chairman and the ranking member of the subcommittee
mentioned a very serious issue for many of this, the failure to
appoint public members. Now, when I raised that issue, I was
told by Assistant Secretary Henry in a letter that the reason
for not appointing the public members was the pendency of the
GSE bill. And he said, ``Well, maybe it doesn't make sense,
given the GSE bill pending.''
Well, that implies, it seems to me, a--the GSE bill creates
a new structure for precisely, among other things, the subject
you are dealing with. And I think a rush to judgement on this
now, before we get the GSE bill, is a mistake. And when I am
told that you can't have members appointed by the
Administration because the GSE bill is pending, but then if you
were to go ahead with this, the contradiction would have to
lead me to believe that something else was at stake.
Now, one of the things I asked to put in the record here,
Mr. Chairman, is a letter to the Housing Finance Board under
the public comments section, July 11, 2006, from a very large
coalition of groups concerned with housing. From advocacy
groups to builders to public officials, it includes, for
example: The American Association of Homes and Services for the
Aging; The National Low Income Housing Coalition; The National
Association of Local Housing Finance Agencies; Habitat for
Humanity; and The National Indian Housing Council. And they
asked the board to shelf this, because of the negative impact
it would have, as proposed, on housing. And I ask that this be
put in the record.
I also ask, Mr. Chairman, that we put in the record your
quotations from the Standard & Poors study on this in July. A
heading of one subsection, ``The new regulation poses inherent
conflicts with the core business of a Federal Home Loan Bank,''
that's from Standard & Poors. And Standard & Poors' conclusion
is, ``Should this proposed regulation be adopted as it is
currently written, Standard & Poors will have to monitor any
negative impacts to the liquidity profile of the individual
bank's core business growth dynamics and membership trends.''
It's a very negative analysis of this.
Obviously, we want to protect safety and soundness. We are,
in fact, hoping to get a bill passed that will enhance the
ability of the regulators to do this. But this does not appear
to be justified by any factual basis for concern. And it is
very likely to have negative effects on membership, and
particularly on the affordable housing program.
Now, the affordable housing program is about 20 years old.
The affordable housing program is one of the few programs we
now have that helps build housing. It has been very well run. I
think it is the model for what we ought to be doing with Fannie
Mae and Freddie Mac. Everyone concerned about it sees a very
strong likelihood of a negative impact in the affordable
housing program from this program.
Now, I appreciate the fact that you tried to put some more
flexibility into that, and you were responsive to concerns I
made, and I thank you for that, for the question of not being
so geographically bound. I appreciate that. But helping it
become more flexible, if it is diminished overall, is a
mistake.
So, if there is a need for some increased capital here,
let's have a better justification. And I am afraid this is an
across-the-board approach that will have negative consequences.
I think, insufficiently, it reduces the incentive for them to
differentiate between activities that have different degrees of
risk. It tends to lump things together, so that is reduced.
And the overall issue to me is that it is a proposal to
cure a problem the existence of which hasn't been documented.
And it's a cure that will damage many of the ongoing activities
here.
I know we have had problems with Fannie Mae and Freddie
Mac, and we are trying to resolve them. And we did agree to
also include more authority over the Home Loan Banks. But this
appears to be motivated, in part, by a kind of general
skepticism of the enterprise, unjustified by any reality that
we have seen.
And, yes, we want to be safe. But not to the point where we
do things not dictated by any, I think, reasonable fear that
will diminish the very important function. Look, we are in a
situation now where the last thing this country needs from the
macro-economic standpoint as well as the micro standpoint, is
further damage to the housing industry. Everybody now
acknowledges that the housing industry, which had carried the
economy to some extent, is now becoming a potential source of
trouble.
To promulgate a rule that would cause all kinds of concerns
about the viability of the housing industry at this time is
about the last thing we ought to be doing. And I would hope
that the board would withdraw this. We are certainly available
to talk. If there is a need for more specifics, let's look at
it.
At the very least, the rationale that says we can't appoint
public board members until the GSE bill's fate is decided
certainly applies heavily to this. And I would hope we would
have, accordingly, the Board act that way. Thank you, Mr.
Chairman.
Chairman Baker. I thank the gentleman for his statement.
Mr. Royce?
Mr. Royce. Thank you, Chairman Baker. I want to thank you
for holding this hearing, and I would also like to thank
Chairman Rosenfeld for his appearance, and his testimony here
before us today.
Over the past 6 years, under Chairman Mike Oxley's
leadership, this committee has held a number of very important
oversight hearings, and this is no exception here today. As one
of the largest financial institutions in the United States, and
frankly, as one of the largest borrowers in the world, the
Federal Home Loan Bank System plays a very significant role in
the U.S. housing finance market.
And I have particular questions about some recent
regulatory actions taken by the Federal Housing Finance Board.
And more specifically, I am interested in learning more about
the Finance Board's thinking and its rationale behind the
recent subordinated debt offering at the Federal Home Loan Bank
of Chicago, and also the proposed rule to increase retained
earnings at the 12 banks.
I am concerned about recent Finance Board action that has
allowed the Federal Home Loan Bank of Chicago to use
subordinated debt in determining compliance with its regulatory
minimum capital requirement. It is my understanding that this
waiver was granted so that $1 billion in subordinated debt
offering could enable the Federal Home Loan Bank Chicago to
redeem stock of withdrawing members, which has the effect of
substituting equity capital with debt capital.
I am interested to know if this regulatory forbearance is
not only unnecessary, but also if perhaps it is inconsistent
with the statutory minimum capital requirements this committee
passed in title six of Gramm Leach Bliley.
Additionally, I think this committee and the public needs
to learn more about how this subordinated debt offering could
affect the joint and several obligations of the Federal Home
Loan Bank System, as a whole.
As to the retained earnings proposed rule, while I
understand the intent behind the Finance Board's desire to
increase the retained earnings at each of the 12 banks, it is
not evident how the Finance Board arrived at some of the
proposed rule's specific requirements.
For example, the rule would require each Home Loan Bank to
hold retained earnings of at least 1 percent of non-advance
assets. However, it is not clear to me how or why the Finance
Board arrived at the 1 percent figure. Perhaps the 1 percent
number is a good target, but I think it would be helpful for
the committee to have an understanding as to why the Finance
Board believes each bank should be required to have that
specific mix of regulatory capital.
Mr. Chairman, I would like to thank Chairman Rosenfeld for
his willingness to engage the committee today. And I yield
back.
Chairman Baker. I thank the gentleman. Ms. Hooley?
Ms. Hooley. Thank you, Mr. Baker, for holding this hearing,
and for all that you have done on GSE reform. And I thank the
chairman and Ranking Member Kanjorski for holding the hearing
today.
Like my colleagues, I have some concern about the proposed
retained earnings rule for the Federal Home Loan Bank System,
both in terms of the rule, and in the process. My primary
concern is regarding the necessity of the rule. When the board
just recently approved capital plans for the 12 Federal Home
Loan Banks, if these capital plans were not sufficient to
protect the soundness of the Federal Home Loan Bank System, it
seems to me they should not have been approved by the Finance
Board.
As the board stated in its proposal, the system is well
capitalized, and the risk of insolvency for any Federal Home
Loan Bank is remote. So my question--is the rule necessary?
Furthermore, the Finance Board did not use an advance
notice of proposed rulemaking, and instead, issued the proposed
rule without feedback from the various stakeholders of the
Federal Home Loan Bank System. As a result, the Finance Board
received over 1,000 comments in response to the proposed rule,
almost all of which were strongly opposed.
When there are so many concerns about the impact of the
rule--and it is clear that this is not an immediate pressing
issue--it seems to me that an advance notice of a proposed
rulemaking is a better way to address the issue, which would
allow for an increased dialogue amongst the board, the Federal
Home Loan Banks, their member institutions, and interested
members of the public, all of which should have, I think, a
voice in the process.
Finally, I have concerns about the possible impact of this
proposed rule, not only on the Federal Home Loan Banks, but the
member institutions and the communities they serve. Under this
rule, the Federal Home Loan Banks will have to increase
retained earnings by over $3 million over the next 18 to 36
months, and that is just an average amongst the banks.
In the case of the Seattle Home Loan Bank, it may take as
much as 10 years for them to reach the required retained
earning minimum. Because of the requirement to dividends, when
a Federal Home Loan Bank does not have the required retained
earnings, the member institutions will suffer from the loss of
income.
Larger member institutions may even seek out alternatives,
and reduce their use of the Federal Home Loan Bank, all
together. As the Federal Home Loan Banks face a reduction in
earnings, it will also lead to reductions in the funds
available for the affordable housing program.
In light of the concerns with the proposed rule, both in
terms of its likely effect on both the Federal Home Loan Banks
themselves and their member institutions, I think this is an
issue that certainly merits further consideration. And we
should ensure that all the concerns of the stakeholders have
been reasonably addressed before moving forward with the rule,
so I just want to have more people involved in the process.
Thank you very much for being here today, and thank you,
Mr. Chairman.
Chairman Baker. I thank the gentlelady. Mr. Hensarling? No
statement? Mr. Castle? Ms. Biggert? In that regard, Mr. Moore?
Mr. Hinojosa?
Mr. Hinojosa. Thank you, Mr. Chairman. Chairman Baker and
Ranking Member Kanjorski, I want to express my sincere
appreciation for you holding this hearing to review the status
of the Federal Home Loan Banks, and the activities of the
Federal Housing Finance Board today.
I have a long statement, and I would ask unanimous consent
that it be included in the hearing today.
Chairman Baker. Without objection. And by earlier request
of Mr. Frank for inclusion of his additional documents, that is
also included without objection.
Mr. Hinojosa. Thank you.
Chairman Baker. Mr. Tiberi?
Mr. Tiberi. Thank you, Mr. Chairman. I will submit a
statement for the record, but just want to thank you for
holding this hearing today, and express my concern about the
proposed rule, and the impact it would have across the country
to the different regions, and hope that this is the first of
more hearings, Mr. Chairman, on this proposal. Thank you.
Chairman Baker. I thank the gentleman for his statement.
Mr. Scott?
Mr. Scott. Yes, thank you, Mr. Chairman. I appreciate this
opportunity. I have some very serious concerns about the
proposed rule. The Federal Home Loan Bank in Atlanta, and all
the 12 others across this country, are doing a tremendous job,
particularly in providing affordable housing funds.
Now, I think it is very important that we understand an
important aspect that--as background. The members generally own
capital stock in the banks, in proportion to the amount of
their business. Bank stock is not publicly traded. Members buy
and sell it at a fixed par value of $100 per share. And the
member stock provides the capital needed to operate the banks
in a safe and sound manner.
Now, as I understand it, your proposal, Mr. Chairman,
asserts that banks could incur losses, and that any loss in
excess of a bank's retained earnings would require members to
mark down their bank stock below par value. Thus, in order to
protect the par value of member stock, the board has proposed
requiring the banks to keep retained earnings equal $50 million
plus 1 percent of total assets minus advances, correct?
The banks would have to cut dividend payments in half,
until they met the new retained earnings requirement. Such a
rule, Mr. Chairman, would make doing business with banks much
less attractive to member institutions, and would dramatically
reduce bank profits and dramatically reduce the affordable
housing funding, which is vitally, vitally important.
Now, my concerns are thus; the need for the proposed rule
definitely has not been established. The premise that the par
value of bank stock must be protected at all costs is
incorrect. In accordance with current accounting policy only,
``other than temporary impairment'' would require a write-down
of member stock.
There has never been such an event in the entire history of
the Federal Home Loan Banking System, and the Board has not
predicted one. And in proposing to change the capital rules for
the bank, your Finance Board itself acknowledged that all the
banks are well capitalized and they face no threat of
insolvency. And even if additional capital in the form of
retained earnings is appropriate for some banks, the proposed
formula is overly simplistic, and does not take into
consideration the specific risk and risk management policies
and policies of each bank.
The proposed formula creates a retained earnings to target
that seems excessive in relation to the risk to the par value
of capital stock for most banks. And the proposed retained
earnings rules formula creates incentives for the banks to take
on more risk and reduce liquidity.
This proposed rule has the potential to create instability
within the system by causing some members to leave the system,
or at least reduce their use of advances significantly. If that
happens, as I said, bank profits and the affordable housing
funding would decline dramatically.
The proposed rule is not consistent with bank capital
requirements as established in Gramm-Leach-Bliley. The
appropriate way to address capital concerns is not this way,
perhaps to modify bank capital plans. There is no justification
for this proposed regulation.
Even if it were demonstrated that there are problems that
need to be addressed--and you all haven't even demonstrated
that--but even so, there are far more effective ways to do that
without driving down the available housing funding.
This proposed regulation has serious adverse consequences
for the banks, their members, and the system of their
respective communities. I would hope we reject this. I hope we
would withdraw this. I think it is bad policy for our banking
system, and would hurt the affordable housing funding
dramatically.
I look forward to your comments on this, and I have some
very, very significant questions I would like to address to you
at that time.
Chairman Baker. I thank the gentleman. If there are no
further opening statements at this time, I would like to
recognize the Honorable Ronald A. Rosenfeld, Chairman of the
Federal Housing Finance Board, welcome you here to the
committee, and express my appreciation for your hard work and
diligence in establishing a new regulatory regime. Please
proceed as you see fit.
STATEMENT OF RONALD A. ROSENFELD, CHAIRMAN, FEDERAL HOUSING
FINANCE BOARD
Mr. Rosenfeld. Thank you, Chairman Baker, Ranking Member
Kanjorski, and distinguished members of the subcommittee. I
appreciate the opportunity to testify on the Federal Housing
Finance Board and the Federal Home Loan Bank System by
testimony, reports on the condition and performance of the
banks, the operations of the Finance Board, the status of two
supervisory actions, and two key regulatory initiatives.
I want first, however, to stress the need for reform of the
regulation and supervision of the housing GSE's. Fannie Mae,
Freddie Mac, and the 12 home loan banks are large, complex
entities. They are important to the Nation's housing market and
play a vital role in the financial markets. They should be
overseen by a single, strong, and independent regulator that
has a full arsenal of supervisory and enforcement tools.
The combined assets of the 12 banks exceed $1 trillion. If
the Federal Home Loan Bank System was a bank holding company,
it would be the fourth largest bank holding company in the
country. Advancers are the largest asset class, consisting of
62 percent of assets. The top 10 holders of advances account
for 33 percent of the total system advances.
Mortgage purchases are even more heavily concentrated than
advances. Mortgage loans purchased from members constitute 10
percent of assets. Almost 70 percent of the mortgages in the
system were purchased from 10 members. The total capital of the
banks is $45.5 billion, or 4.4 percent of assets. Of that
total, retained earnings are $3 billion.
In the first 6 months of 2006, the banks' net income was
$1.25 billion. The banks have grown in size, sophistication,
and risk in recent years. Many of the banks were not equipped
to deal with those changes. They did not embrace and implement
appropriate governance and risk management tools.
Two examples are the Seattle and Chicago banks. The Seattle
and Chicago banks continue to operate under written agreements.
While the particulars of each case are different, both had a
high level of excess stock, and both were intent on growing
their mortgage portfolios. The Chicago bank grew its mortgage
portfolio by relying on excess stock. The Chicago bank's
mortgage portfolio grew to 60 percent of assets and excess
stock constituted approximately 60 percent of its capital
stock.
When the Chicago bank's earnings declined and dividends
were reduced, as one might expect, member requests that the
bank repurchase excess stock accelerated. To conserve its
capital, the bank halted its repurchase of stock. In response,
members holding over a quarter of a billion dollars in stock
elected to withdraw from the bank. That process began a 6-month
statutory redemption clock. We then had to act decisively and
quickly.
There were no easy options. The Chicago bank, unlike
Seattle and the other 10 banks, had not yet converted to the
Gramm-Leach-Bliley capital structure. After reviewing a number
of alternatives, we permitted the Chicago bank to issue
subordinated debt. The bank issued $1 billion in 10-year
subordinated debt, which is used to retire a like amount of
excess stock that was redeemable with 6 months notice.
That solution provided the Chicago bank's new management
team time to work through and resolve the bank's financial
issues. We have learned from our supervisory experiences. We
have also increased the supervisory staff, and upgraded our
risk modeling technology. We now have the resources to better
monitor risk, and the wherewithal to take early and resolute
action where problems emerge.
We have also taken a number of important regulatory
actions. One of these is our rule requiring the banks to
register with the SEC. All banks are now SEC registrants.
Investors, other home loan banks, and the public now have a
full and fair view of the financial condition and performance
of each of the banks.
A second regulatory action is our proposed rule on retained
earnings and excess stock. In April of this year, the Finance
Board issued for public comment a proposed rule to strengthen
the capital composition of the banks. We are analyzing the
1,066 comments we received, and are taking an open minded and
cautious approach to the final rule.
We will be guided by some fundamental principles.
Specifically, we will do nothing to impede the good business
judgement of the banks. We will not materially alter the value
of membership in a bank, we will respect the lawful actions
that banks have previously taken.
Speaking only for myself, some commentators made valid
points, and there is room for movement on several important
issues. I want to be clear. I will never be apologetic about
capital. While the capital level of the banks exceeds the 4
percent statutory minimum, the composition of the bank's
capital needs to be strengthened. That's the purpose of our
proposed rule.
Some comments state that that proposed rule is contrary to
the statutory intent of Gramm-Leach-Bliley, and that we have
exceeded our regulatory authority. We strongly disagree. The
intent of Gramm-Leach-Bliley was to stabilize and strengthen
the capital of the banks. Our proposal does exactly that. The
rulemaking is fully consistent with our regulatory authority,
and is an exercise of our regulatory duty. It is our duty to
ensure the financial safety and soundness of the banks, a duty
entrusted to us by this Congress.
Chairman Baker, Ranking Member Kanjorski, and the members
of the subcommittee, thank you for the opportunity to report on
the condition of the Bank System and the Federal Housing
Finance Board. I would be pleased to respond to any questions.
[The prepared statement of Chairman Rosenfeld can be found
on page 36 of the appendix.]
Chairman Baker. Thank you, Mr. Chairman. I appreciate the
manner in which you have approached this regulatory proposal,
and certainly can understand how a GSE regulatory concept and
controversy could be associated with one another.
You could, in some instances, erase the name, ``Federal
Home Loan Bank,'' and put the words ``Fannie Mae'' and
``Freddie Mac'' in, and play back a few years ago, and it would
not be too dissimilar.
However, there is one element of the proposal that I found
particularly interesting, if not troublesome. And that is, with
regard--if I am understanding it properly--with regard to the
holding of cash to require reserving, if you had $100, to
reserve against that $100 in your account, is there a
particular structural regulatory reason why reserving against
cash on hand, which I thought would be a bit onerous?
On the other side of the coin, however, not stated in most
of the talking points distributed by the opponents of the
matter, but expressed to me by intermediaries, and just--I find
on these GSE things, you might as well just get it all out on
the public domain--that some are suggesting there are other
reasons, other than just capital adequacy, for the proposal of
the current rule.
Some have suggested this is just a first step for some sort
of consolidation proposal. Others are more direct, in calling
it just an attack on their profitability through the mortgage
purchase program.
If you could, just outline your policy reasons for the
proposals construct. I think in your opening statement you
referenced the necessity for adequate capital to hedge against
any identifiable risk.
But that ought to--we ought to dismiss these other
accusations outright, or discuss the legitimizing reasons for
the manner in which you're approaching this. And please proceed
as you desire on those.
Mr. Rosenfeld. Chairman Baker, you have given me a
smorgasbord of possibilities, in terms of responding to the--to
elements of the proposal. Let me attempt to deal with them as I
recall them being raised.
With regard to the commonality of the same retained
earnings for all types of assets, other than advances. That is
an area that we have received a great many comments on, and
something that we are carefully considering.
In the course of receiving comments, we have been apprised
of some things relating to that concept, which is--certainly
provides the benefit of simplicity. But it also has the
potential of perhaps adversely affecting prudent business
judgement. And therefore, it is something that we need to look
at very carefully, as to whether we ought not apply some degree
of risk weighting to various types of assets. And that is
clearly one of the things that has been raised.
While I am on areas that have been commented upon
extensively, the other areas, though, one is the area of stock
dividends. A number of people have said, ``Well, if you're
going to limit excess stock, why limit how you get there? I
mean, just stick with one objective, and that ought to be
enough.'' And besides, some of the banks rely heavily on excess
stock--pardon me, on stock dividends.
The third area that has received a great deal of comment
and has been referenced by a number of your committee members
is this issue about until they reach a required level of
retained earnings, dividends can be no more than 50 percent of
income.
Again, that is an area that--where the comments have been
extraordinarily helpful, because a number of commentators have
suggested that as long as there is no particularly urgent issue
in the system today, it need not be so difficult, and the banks
ought to have more time to get there, which raises an
absolutely remarkable point, and that is there are 12 Home Loan
Banks in the system. Eight or nine of the banks, in terms of
the retained earnings requirement, are at or very close--within
a stone's throw--of being there.
So, this notion of how Draconian it is, is simply nonsense.
Eight or nine of the banks are there, or will be there very
shortly, without doing anything. In addition to which, the
other Draconian allegation that was made towards this limit on
excess stock, 8 of the 12 banks are there now. And one or two
are very much on their way.
So, the impact--this enormously broad opposition throughout
the country and all the banks simply doesn't exist. It is
absolutely nonsense. And let me point out to you that on the
issue, for example, the issue of excess stock, which is one of
the pillars of the proposal--we've got 400-some letters,
comments, on that issue--81 percent of the letters came from
the Cincinnati Bank.
And throughout the entire comment period, what has happened
is that the vast majority in virtually every single category
has come out of the Cincinnati Bank. That's not to suggest the
comments from the other banks are not important; they are very
important. And quite frankly, they are very helpful. I just
wanted to convey to you the fact that this is--that there is
not this enormous outpouring of opposition throughout the
country. It largely emanates from a campaign by the Cincinnati
Bank. And we respect that, there is nothing wrong with that.
With regard to the issue that we have in the ulterior
motives, I have heard a couple of them alleged. Number one, is
this our way at getting at the mortgage programs? The answer is
absolutely not. If we decide to take some action with regard to
the mortgage program, believe me, Mr. Chairman, we will take it
directly. We will never go through the back door, we don't need
to. That's not the way to regulate.
Number two, the issue of consolidation, which has been
raised frequently. The answer to that is we have stated
publicly that we have--we are not promoting the consolidation
of banks. We have said if two or more banks decide they want to
merge, we will be cooperative and help them do it.
Quite frankly, in my mind, I don't quite understand why you
need six banks between Pittsburgh and Topeka. But if that's
what the members want, and that's what the members are willing
to pay for, and they run those institutions in a safe and sound
fashion, that is their prerogative. It is not our call to
change, and we have no intentions of changing.
And quite frankly, Mr. Chairman, my memory at my age is--I
can't remember some of the other issues, but if you could help
me out--
Chairman Baker. No, you have done an excellent job. One,
your intention is to provide safety and soundness, providing a
capital basis which you believe is justifiable. You don't have
ulterior motives in mind that you are attempting to achieve.
You perhaps will consider further adjustments to the pending
rule, and you will not move and give adequate time for people
to make further comment as warranted. Is that summarized
properly?
Mr. Rosenfeld. Yes, sir.
Chairman Baker. Thank you very much. Mr. Kanjorski?
Mr. Kanjorski. Mr. Rosenfeld, in an article this morning,
in one of the banker's publications, they refer to the fact
that Washington Mutual is--in regard to the ruling, because of
the cost to them of the retained earning role, it would cost
them $210 million. They are going overseas to finance.
Now in my prior life as an attorney, I represented co-ops,
and I very often found that members of co-ops are very astute
in figuring out the effect of the co-ops' policies upon their
particular earnings. And this is a strong indication that they
are voting with their feet. They have other alternatives; they
can go overseas. So I don't know whether it is--for safety and
soundness--it is smarter to drive a customer, the largest
customers to the banks of the System, to go overseas and do
their financing.
And that is why I think it's important that--and I can
understand why we want to get safety and soundness, there isn't
any question of that. But the implementation of these rules, or
the inflexibilities of the rules, may cause unintended
consequences of actions just like this.
I don't want to dwell on that because I think the
chairman's questions and your response served a lot of those
purposes.
I really want to find out about something that is--it's
sort of offensive, because I was under the impression when we
have met in the past, that you were going to be a hands-on
regulator. You were going to get out into the field, and find
out what is happening. Have you gone and met with the boards of
directors of the various banks, and--
Mr. Rosenfeld. I have not gone to the banks. I have met
with them, met them here in Washington.
Mr. Kanjorski. Are they telling you something different
than I am hearing, that they are being literally choked by not
having adequate membership on--
Mr. Rosenfeld. Oh, quite the contrary, Mr. Kanjorski. I
have had very little comment from the banks. As a matter of
fact, with the exception of some issues with regard--a couple
of banks have mentioned a problem with staffing committees on
the bank board. But beyond that, there has been very little--
surprisingly little--commentary from the banks.
Mr. Kanjorski. Do you know what some of the banks are
doing, as a result--
Mr. Rosenfeld. Well, I know what the Pittsburgh bank has
done, and that is they have gone out and where one might have
hoped that they had certain talent that was in the form of
public interest directors with certain skill sets, since they
don't have that, they have gone out and hired consultants,
which is an interesting approach.
Mr. Kanjorski. And they're the same people who would have
been serving on the Board--
Mr. Rosenfeld. Not necessarily. The people--the most well
qualified don't necessarily get on the Board.
Mr. Kanjorski. Well, then, is your hesitancy in making
these appointments that you think the Administration is not
offering competency in the appointment of these directors?
Mr. Rosenfeld. No, no, no. I am responding to the
difference between the expertise of a consultant--
Mr. Kanjorski. I understand. But--
Mr. Rosenfeld. And--
Mr. Kanjorski. Mr. Rosenfeld, I have extraordinary contacts
with all of these banks across the country, and I visit with
them on a regular basis.
Now, either they are not talking to you the way they are
talking to me, but I have to tell you that, internally, for
governance purposes, they are hurting. And their institutional
memory is suffering. I think that the majority of the members
at the end of this year will have less than 3 years' experience
on the board.
Mr. Rosenfeld. I respect that, Mr. Kanjorski. I understand
what you are saying, and I respect it. But please, let me
comment on one thing you said earlier, with regard to
Washington Mutual.
Mr. Kanjorski. Yes.
Mr. Rosenfeld. Interestingly enough, I would suggest that
the proper interpretation of their action is just the converse
of what you are suggesting. And the reason that--well, I am
sure one of the very significant reasons that WAMU is seeking
to withdraw, or at least do less business, with the Home Loan
Bank System is their experience in Seattle.
Seattle is a terrible situation for WAMU, because they are
getting--they have a big presence, and they are getting zero
dividends. The reason they are getting zero dividends is
because we did not have in place the rules that we are now
trying to put in place. WAMU would have a totally different
experience with the Home Loan Bank System, had Seattle not
succumbed to the problems that they--
Mr. Kanjorski. Well, aren't they a member of another bank,
the San Francisco--
Mr. Rosenfeld. They are a member of the San Francisco--
Mr. Kanjorski. Why don't they go to the San Francisco bank?
Mr. Rosenfeld. I think the San Francisco bank, to my
knowledge, they have not had a bad experience there. And I
don't think you can contribute--with an organization as big and
sophisticated as WAMU is, or Wells Fargo, or Bank of America,
they have all sorts of reasons for how they fund their needs.
And we certainly can't blame a decision to go overboard or
go to the private sector, or whatever, on the--
Mr. Kanjorski. Okay. I accept that, and we will have to
look at that maybe in a future hearing. We can call Washington
in to explain why they made these judgements. But I am seeing a
lot of business here move overseas that could be in the
American market.
But getting back to the directors, what does the Congress
of the United States have to do? The present law says it is
your responsibility to make these appointments. You have
refused to do so.
I have to ask the question, are you an independent
regulator, as you have defined it, totally at arm's length with
the industry, and totally independent of all other influence,
or are you failing to carry out these appointments by some
statement or conversation with the White House, whose policy is
not to make these appointments? Are you failing to carry out
your function as a regulator independently, because of
something this White House is telling you to do?
Mr. Rosenfeld. I believe that we are an independent
regulator. I also believe that it is inappropriate for a
regulator to appoint the regulated.
Mr. Kanjorski. Oh, you disagree with the law, then?
Mr. Rosenfeld. I think a regulator should not appoint the
regulated. I am aware there is a statute. I believe, however--
Mr. Kanjorski. Mr. Rosenfeld, you mean the regulator now is
going to pass and interpret the laws governing these banks, or
is the Congress--
Mr. Rosenfeld. I think the statutes are such, the latitude,
in terms of time, as to when to appoint, while the issue of GSE
reform--which has been referred to numerous times today--
Mr. Kanjorski. Mr. Rosenfeld, 2\1/2\ years, not one
independent director to any of the banks has been appointed by
your office or your predecessor. Is that correct?
Mr. Rosenfeld. That is true. I believe the real answer is
to have GSE reform.
Mr. Frank. Will the gentleman yield?
Mr. Kanjorski. I will yield, Mr. Frank.
Mr. Frank. Again, Mr. Rosenfeld, it is--first of all, the
suggestion that consultants can make up for boards of
directors, and that it is somewhat interchangeable--
Mr. Rosenfeld. I'm sorry?
Mr. Frank. I hope you don't really think, really mean to
say, that you can solve a problem of not having an appropriate
board of directors by hiring consultants.
Mr. Rosenfeld. I didn't--
Mr. Frank. Yes, you said, ``Well, they lost the
expertise.''
But secondly, this assertion that you can't appoint
directors because GSE legislation is pending, but you can
promulgate the most far reaching change in the capital
structure when that's also the subject of GSE legislation,
that's the least logical argument I have ever heard here.
Chairman Baker. If I might interject here, gentlemen, just
for the moment--Mr. Kanjorski, we are down to a little over 3
minutes on the pending vote. We are going to recess and come
back to continue. So if I may ask the indulgence of the
chairman, the committee will stand in recess for about 15
minutes.
[Recess]
Chairman Baker. I would like to reconvene our hearing on
capital markets. When we were last meeting, I believe it was
Mr. Kanjorski who had been previously recognized. So I would
now go to the Republican side, and recognize Ms. Kelly for any
comment or question she may have.
Mrs. Kelly. Thank you very much, Mr. Chairman. In its
proposed rule concerning deposit insurance assessments that was
published on July 24th, the FDIC specifically requested
comments on whether the Federal Home Loan Bank advances should
be included in the definition of ``volatile liabilities'' for
risk differentiation purposes for smaller institutions with
less than $10 billion in assets.
Frankly, I don't see a need for charging higher premiums
for prudently managed and sufficiently capitalized
institutions, simply because they use the Federal Home Loan
Bank advances. Advances are not volatile liabilities. Of the
sources available to community banks, Home Loan Bank advances
are the only ones which have been around for nearly 75 years,
and which have been--and which are purchased on a pre-defined
and predictable term by fully regulated member lenders.
Obviously, this is a matter that should be on the radar
screen of the FHFB. And in this regard, I would like to know if
the FHFB considers advances to be volatile liabilities. You can
probably just answer that yes or no.
Mr. Rosenfeld. No.
Mrs. Kelly. Okay.
Mr. Rosenfeld. Absolutely not. I think it is a mistake to
use the term ``advances'' and ``volatility'' in the same
sentence.
Mrs. Kelly. Okay. In addition, is FHFB planning to take a
position on the Federal Home Loan Bank issue raised in the
FDIC's proposal, and notify the FDIC of its views?
Mr. Rosenfeld. I am sure that, to the extent that we are an
involved participant, we will appropriately make our position
known.
Mrs. Kelly. All right. Thank you, Mr. Chairman, he has
answered my question. I yield back.
Chairman Baker. I thank the gentlelady. Mr. Clay?
Mr. Clay. Thank you, Mr. Chairman. And thank you for being
here.
The affordable housing programs of the FHL Banks has been a
tremendous success, with over $2 billion in grants for
affordable housing since 1990. These AHP grants by FHL Banks
provide capital so that member institutions and community
sponsors can arrange for the development and construction of
affordable housing.
At a time when more families need affordable housing, it is
troubling that the Finance Board has issued a proposal whose
effect on FHL Bank System, you acknowledge in your July letter
to Congressmen Oxley and Frank, is uncertain. Since the AHP
program depends directly on FHL Bank earnings, this is even
more troubling.
What analysis has the Finance Board done on the potential
impact of the proposal on the AHP program?
Mr. Rosenfeld. I am delighted you asked that question,
because a number of commentators and a number of
congresspersons here have made the statement that somehow or
another these proposals adversely affect AHP. I would submit to
you that that's simply wrong.
First of all, in both the case of the retained earnings
provisions, as well as the excess earning--excess stock
provisions, roughly three-quarters of all the banks simply
aren't affected at all. So I think you can eliminate them from
the issue of whether anything negative would occur in their AHP
program.
I would also suggest that AHP contributions are based upon
earnings. To the extent that you increase retained earnings,
that does not affect your income. If it did anything, it would
increase the income, not decrease the income. I can think of
perhaps one bank, maybe two, where the excess stock provisions
would have a bearing in possibly reducing AHP payments.
But I would point out to you the worst thing that has
happened to AHP, which is a wonderful program, and we all
acknowledge it, has been Seattle and Chicago. That's where AHP
has gotten hurt. I wouldn't want to be the person that called
on Seattle to get their contribution to AHP. It's not a pretty
number.
And what we are trying to do is to make sure that those
kinds of things that reduce the earnings of banks and adversely
affect AHP simply don't occur again. That's what this is all
about.
Mr. Clay. Let me follow up on that vein. What alternative
funding source may be available for affordable housing, if FHL
Bank earnings decline, as a result of the proposal?
Mr. Rosenfeld. Well, first of all, the answer to increasing
AHP profitability is to increase the business and increase the
earnings.
For example, there are some pending new business activities
in the area of working with insurance companies, which could be
the source of additional income. I think Mr. Kanjorski is
familiar with a proposal to have the FHLB be able to credit
enhance industrial bonds, which could be a new source of
revenue appropriately--if it were appropriately underwritten.
There is--quite frankly, the Home Loan Banks have an
enormous opportunity. What they need to do, as any good
business does, is through the use of ingenuity and technology
working together, create better products, do a better job, in
terms of growing their businesses.
I would point out to you that it takes a Des Moines bank--
the Des Moines bank has had a number of problems in their
mortgage portfolio. They had 90 percent of their mortgages that
they bought coming from 1 customer. What prudent businessperson
would ever allow 90 percent of their portfolio of anything--
certainly anything significant--to come from 1 customer?
Now, I would also point out that Des Moines has 1,190 other
banks in the system, in their membership. Boy, I will tell you,
if I ran Des Moines, I would be out trying to figure out what I
could sell to those other 1,190 banks. That's how you grow
earnings. It's a business.
Mr. Clay. So, the banks should be innovative and look at
new business ventures?
Mr. Rosenfeld. Absolutely. That is what I am--that's
American business. That is why we are where we are. Innovation
is critical.
Mr. Clay. I thank the witness for his response, and thank
you, Mr. Chairman. I yield back.
Chairman Baker. I thank the gentleman. Mr. Campbell, did
you have--Mr. Scott?
Mr. Scott. Thank you very much, Mr. Chairman. Let me visit
this issue of the affordable housing program. And your response
to Congressman Clay's question somewhat intrigued me, when you
just cavalierly passed that off. Let me tell you how I
understand the impact that your ruling will have on drying up
affordable housing funds.
First of all, as your rule would do, FHL Banks would be
forced to retain earnings, no matter what their individual
business plans or risk profiles look like, over $2 billion will
be retained. And that $2 billion will be $2 billion that will
not be distributed through FHL Banks' member institutions to
the borrowing public.
And in addition, as the FHL Bank adjusts their business
operations to take into account that some of their larger
members will leave because the FHL Bank membership is no longer
financially attractive--I am not saying you are intentionally
trying to dry up that fund. This is unintended consequences. If
your membership leaves, and is no longer financially attractive
to the Home Loan Banks, then the cost of the FHL Bank advances
to remaining members will increase, and members will, in turn,
pass on those increased costs to working class families who are
seeking home mortgages.
Now, if the FHL Bank members leave--and, indeed, they will,
as you have mentioned two or three of them, but there will be
more than that--another potential adverse effect of the rule
that would drive affordable housing money is that the earnings
of the FHL Banks will decrease, thereby decreasing the amount
of funds available for FHL Banks' affordable housing programs.
Each year, the FHL Banks contribute 10 percent of their
earnings as seed capital to the affordable housing program,
which sponsors the local community groups, and backed
financially by FHL members.
Of course, as we pointed out, since 1990 the FHL Banks have
provided over $2 billion in affordable housing funds. This
public/private partnership is vital to providing decent housing
opportunities for working class families. And your rule, the
Finance Board rule, will--and let's be generous here, and say
``inadvertently''--but it will, nonetheless, restrict the
ability of the FHL Banks to meet their affordable housing
funding responsibilities.
To show you how serious this is, this is an article in
today's paper. Here is what it says, ``African Americans not
closing the gap in home ownership rates.'' The report blames
two things: discrimination and lack of affordable housing
funds.
Now, it is clear, as I have pointed out, how this would
work. And I don't understand why you all have not taken that
into consideration, that members will leave, drying up the
amount of money that is there. And even when you put the
pressure on, it will be downward pressure with this $2 billion
that won't be available public monies, anyway. In two ways you
are taking available funds out of the market place, out of
play, that would help with the affordable housing fund.
Mr. Rosenfeld. Mr. Scott, I share your obviously great
interest in affordable housing. As you know--perhaps you don't
know--I spent most of my Federal service at HUD, and I really
do share your concerns and your beliefs in the importance of
that issue.
But I would respectfully suggest that you are
misinterpreting something. The amount of dividends that a bank
pays to its members has nothing to do with its earnings. The
contributions to AHP are made at the Federal Home Loan Bank
level, which is--and that amount of contribution is determined
by their income. Dividends to the members have nothing to do
with it.
And I would point out, as a practical matter--and this is
not a reason to make the proposal, but as a practice matter--
the more retained earnings you have, which are invested, the
greater your income is. So the reality is that by having more
retained earnings, that in and of itself increases income--and
therefore, AHP contributions--rather than decreases them.
The one comment--or, I shouldn't say one--you made a
comment about major banks leaving, and therefore that could
adversely affect income, and therefore adversely affect AHP
contributions. Theoretically, that is possible. But both in my
written statement to the committee, and my oral statement, I
tried to make it very clear that one of the things we will
consider in doing the final rule is that we don't materially
change the value calculation for members, and we are very
conscious of that.
Again, I reiterate that 75 percent of the members are
unaffected. So you are talking about perhaps two banks, two or
three banks, where we have to be extremely cautious and careful
that, however the final rule comes out, that we don't
materially adversely affect the value of membership.
Mr. Scott. Seventy-five percent of the banks won't be
affected? One of those 25 percent affected might be my bank,
the Federal Home Loan Bank of Atlanta.
Mr. Rosenfeld. I don't think so.
Mr. Scott. And even if it is not, if one bank is impacted
by this rule negatively, it should not be in place.
Mr. Rosenfeld. If we had this rule in place 3 years ago,
AHP would have substantially more money today than they have.
Chairman Baker. Mr. Scott--
Mr. Scott. Yes, I want to ask another question.
Chairman Baker. If this can be your final, we will wrap up,
Mr. Scott.
Mr. Scott. Even if there are some Home Loan Banks with
inadequate capital, your proposal doesn't appear to adequately
differentiate such home loan banks from others that have plenty
of capital. I mean, why not?
And how do you justify requiring the same capital for cash
and cash equivalents as you require for mortgages and
relatively high risk securities? And what analysis have you
done to justify the proposal?
And I do understand that you were asked to disclosure your
analysis before, but you refused. Why?
Mr. Rosenfeld. Well, I don't recall the specific facts, but
I can't imagine I refused to disclose an analysis. I can tell
you that the issue that you are alluding to, in terms of the
potential risk waiting for different types of assets, I think,
is an issue that has been raised by many people.
I think the notion of 1 percent for all kinds of assets
needs to be seriously revisited. We intend to do so. And I
think there is a great deal of merit in the--as I mentioned
with the commentators, I think there is a great deal of merit
in your question.
The answer is, I mean, the very simple answer is when
you're doing this sort of thing we start with a very simple
principle. What we have come to understand, through the benefit
of the comments, is that the simple principle may be a better
principle if it's somewhat more complex. And we are very
concerned that the principle, as proposed in the rule simply
might lead to what could be poor business judgement on the part
of bank management.
And again, as I said in my testimony, that is something we
clearly want to avoid. So, we are going to do whatever we can
to get away from anything that would create poor business
judgement on the part of management.
Mr. Scott. Mr. Chairman, I am going to thank you for your
indulgence on that, and the question, and I certainly want to
submit this very important article, very timely, about the lack
of affordable housing and its impact on working class folks,
for the record.
Chairman Baker. Without objection, Mr. Scott.
And we will keep the record open, so if members choose to
submit additional written inquiries of the chairman, they
certainly may do so.
I want to express my appreciation to you, Mr. Chairman, for
being available, for coming before the committee. It is clear
that Members have a number of considerable concerns about the
proposal, but I was pleased to hear your comment indicating
that the rule is still subject to potential modification, that
you will move ahead slowly, listening to those legitimate
concerns that have been raised, and will continue to advise the
committee as to the intended consequences of this rulemaking
process. And for that, I am appreciative.
And thank you for your courtesy in appearing here today.
Our meeting stands adjourned.
[Whereupon, at 11:40 a.m., the hearing was adjourned.]
A P P E N D I X
September 7, 2006
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