[Congressional Record Volume 143, Number 155 (Friday, November 7, 1997)]
[Senate]
[Pages S12012-S12013]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HAGEL (for himself, Mr. Bennett, Mr. Kerrey, and Mr. 
        Grams):
  S. 1423. A bill to modernize and improve the Federal Home Loan Bank 
System; to the Committee on Banking, Housing, and Urban Affairs.


          the federal home loan bank system modernization act

  Mr. HAGEL. Mr. President, I rise today to introduce the Federal Home 
Loan Bank System Modernization Act of 1997. I am joined in this effort 
by my distinguished colleagues Senators Bennett, Grams, and Kerrey.

  This legislation represents months of work in crafting a bill that 
has bipartisan support. The process has been open, and we have included 
all the affected parties: The Federal Home Loan Banks themselves, the 
Federal Housing Finance Board, and the banking industry. This process 
has allowed us to craft legislation that represents, above all, sound 
banking policy.
  This bill will help community banks and the consumers who rely on 
them. Take, for example, the case of Commercial State Bank in Wausa, 
NE. Commercial has served northeast Nebraska as an agricultural and 
business lender for more than 70 years.
  Now, with a growing economy in the region, the bank is growing as 
well. In the small community of 600 people, deposits cannot keep pace 
with the growing demand for loans--and that means the bank's liquidity 
is declining. With less liquidity, there just isn't as much money 
available for lending as the community demands.
  This bill would help banks like Commercial and communities like 
Wausa. As Doug Johnson, president of Commercial State Bank, wrote to me 
about this legislation:

       If banks like the Commercial State Bank were able to access 
     the Federal Home Loan Bank, our customers would be better 
     able to be serviced with a consistent and competitive source 
     of funding. Denying credit to qualified borrowers is not 
     productive for Nebraska or the Midwest. Unfortunately, those 
     borrowers may miss the opportunities available to them at 
     this time to improve their economic prosperity.

  Mr. President, that is what this bill is all about--helping small 
communities to better secure their economic futures.
  The Federal Home Loan Bank system was established in 1932, primarily 
to provide a source of credit to savings and loan institutions for home 
lending. Now, a majority of the members in the FHLB system are 
commercial banks. We should update this system to recognize this change 
in its membership.
  Not since 1989 has significant Federal Home Loan Bank legislation 
become law. The system is working well, but I believe Congress can make 
it better. It's time for Congress to act.
  This legislation has four main components:
  First, it recognizes the importance of the FHLB system to community 
banks. Many smaller institutions are dependent on deposits to fund 
lending in their local communities. Because of competition from non 
bank competitors, those deposits are shrinking. That is going to mean 
less community lending--which will hurt the economies of these small 
communities. A recent article in American Banker newspaper titled 
``Small Banks Face Crisis as Deposits Drain Away'' highlighted this 
problem, and I ask that this article be printed in the Record at the 
conclusion of my remarks.
  Our legislation would ease membership requirements for smaller 
community banks and thrifts that are vital sources of credit in their 
local communities. It would allow the FHLB System to be more easily 
accessed as an important source of liquidity for community lenders. 
These institutions would be permitted to post different types of 
collateral for various kinds of lending. This critical change will 
facilitate more small business, rural development, agricultural, and 
low-income community development lending in rural and urban 
communities.
  The second main component of this bill is an issue of basic fairness. 
Federally chartered savings associations, or thrifts as they are called 
today, are required to be members of the Federal Home Loan Bank System. 
Commercial banks, on the other hand, are voluntary members. This 
disparity is unfair.
  Our legislation allows federally chartered thrifts to become 
voluntary members. This is important to these institutions, which are 
large stockholders in the Federal Home Loan Bank System. It is critical 
that all member financial institutions have the ability to choose 
whether Federal Home Loan Bank membership is appropriate or not. As a 
result of this action, we also equalize stock purchase requirements for 
all member institutions. We do this in a way that maintains and 
enhances the safety and soundness of the FHLB system.
  The third component of this legislation fixes an imbalance in the 
system's annual REFCORP obligation. Currently, the 12 FHLBanks must 
collectively pay a fixed $300 million obligation to service the REFCORP 
bonds

[[Page S12013]]

that were issued to help pay for the S&L bailout. This fixed obligation 
has driven the banks to increase their levels of non-mission-related 
investments.
  Under our legislation each FHLBank would be required to pay 20.75 
percent of its earnings to service the REFCORP debt. Freeing the 
FHLBanks of the obligation to generate a specific dollar figure would 
allow them to concentrate on their primary mission of housing finance 
and community lending. This change was scored by the Congressional 
Budget Office as increasing Federal revenues by $44 million over the 
next 5 years. In other words, this change would allow a $44 million 
reduction in taxpayer obligations.
  Fourth and finally, the legislation addresses the issue of devolution 
of management functions from the Finance Board to the FHLBanks. On 
issues of day-to-day management, the FHLBanks should be able to govern 
themselves independently of their regulator. The function of the 
Finance Board should be mission regulation and safety-and-soundness 
regulation. The provisions of the legislation that accomplish this goal 
are non controversial and enjoy broad support.
  Mr. President, it is time to modernize the Federal Home Loan Bank 
System. The landscape of the financial services industry is rapidly 
evolving. The Federal Home Loan Banks should be allowed to modernize to 
keep pace with these changes. I am proud to take up this issue in the 
Senate and build on the work done in the House of Representatives by 
Congressmen Baker and Kanjorski, both tireless proponents for Federal 
Home Loan Bank modernization. Their help in the formulation of this 
legislation was critical.
  I sincerely hope the Senate Banking Committee and the full Senate 
will have the chance to consider this important legislation, and I 
encourage my colleagues to support it.
  Mr. President, I ask unanimous consent that additional material be 
printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                 [From American Banker, Oct. 14, 1997]

             Small Banks Face Crisis as Deposits Drain Away

                       (By Laura Pavlenko Lutton)

       Community banks are finding it increasingly tough to meet 
     deposit and withdrawal demands as customers shift their 
     deposits into higher-yielding investments like mutual funds. 
     ``I think it could become a crisis,'' said C. William 
     Landefeld, president of Citizens Savings Bank in Bloomington, 
     Ill., and chairman of America's Community Bankers. ``It's one 
     of our biggest concerns.''
       Over the last three years, loans at banks with assets 
     between $100 million and $1 billion have grown nearly 11% 
     while deposits only increased 3.27%, according to the Federal 
     Deposit Insurance Corp. At June 30, loans at these banks 
     averaged 74% of deposits--an all-time high. ``We're clearly 
     seeing some community banks struggle with liquidity,'' said 
     Keith Leggett, an economist at the American Bankers 
     Association. Loan-to-deposit ratios above 70% force these 
     institutions to seek alternative sources of funds to meet 
     loan demand--a move that can squeeze profit margins.
       ``Banks may give up liquidity to meet loan demand and that 
     raises a safety question,'' he added. While deposits are 
     leaving banks of all sizes, the problem is worst at small 
     banks because they have fewer funding sources. ``The big 
     banks can issue debt securities, but we can't really do 
     that,'' said Arthur C. Johnson, president of United Bank of 
     Michigan, a $165 million-asset bank in Grand Rapids.
       ``Smaller banks don't have the same access to the capital 
     markets.'' Many of these banks also are in towns with 
     dwindling populations or slumping economies. Dennis Utter, 
     president of $45 million-asset Adams County Bank, said it's 
     difficult to keep deposits in the bank's hometown of Kenesaw, 
     Neb. Baby boomers have moved much of their savings to 
     alternative investments, and younger depositors are even 
     tougher to attract, he said. ``When an old, loyal customer 
     passes away, those funds don't stay in Adams County Bank,'' 
     he said. ``The heirs don't live here anymore.''
       To increase liquidity, community bankers are turning to the 
     Federal Home Loan Bank System, seeking out deposit brokers, 
     nudging up interest rates, or selling off assets. The 12 
     Federal Home Loan banks, which lend money to member 
     institutions, are a popular source of funds for community 
     banks nationwide. Membership in the system has doubled in the 
     last six years to roughly 6,300, and through August total 
     loans were up 10.3%, to 177.8 billion.
       Mr. Johnson said United Bank of Michigan has borrowed $5 
     million from the Federal Home Loan Bank of Indianapolis to 
     fund loan growth. But the Federal Home Loan Bank System is 
     not the answer for all community banks. Membership is limited 
     to banks and thrifts with mortgages making up at least 10% of 
     their total loan portfolios. What's more, only mortgage loans 
     may be used as collateral, further limiting what some 
     institutions may borrow.
       William L. McQuillan, president of City National Bank in 
     Greely, Neb., said his bank went out and brought enough 
     mortgages to meet the 10% test so it could start borrowing. 
     ``We couldn't continue to go out in the local market and pay 
     up for deposits,'' he said. The membership and collateral 
     requirements soon may be relaxed through rule change and 
     pending legislation.
       For example, banks may be able to reclassify some 
     agricultural loans as mortgages under a proposed rule, and 
     pending legislation would waive the 10% mortgage rule for 
     banks with assets under $500 million--making 800 more banks 
     eligible for membership. In the meantime, banks may buy 
     deposits from brokers. Mr. Utter said he buys about $5 
     million of deposits to get Adams County Bank through the peak 
     agricultural lending season of April through October.
       ``Brokered deposits used to be really frowned upon by 
     regulators, but we're not funding long-term investments'' he 
     said. Bank also sell older loans in their portfolio, 
     branches, or other investments to boost liquidity.
       Gary Scott, president of Cheatam State Bank in Kingston 
     Springs, Tenn., said his bank occasionally bundles 15- to 20-
     year mortgages and then sells them to raise cash. Citizens 
     Savings Bank recently sold one of its under-performing 
     branches to bring in new funds. The bank sacrificed the 
     branch's $7 million of deposits, but Citizens was able to use 
     cash from the sale to pay off some Federal Home Loan bank 
     advances, Mr. Landefeld said.
       First Dakota National Bank in Yankton, S.D., has sold off 
     municipal bond securities in recent years to increase its 
     loan capacity, according to its president, James Ahrendt. Lew 
     Stone, president of Goleta (Calif.) National Bank, said his 
     bank is using the Internet to solve liquidity problems. 
     Goleta sells certificates of deposit through an electronic 
     bulletin board, raising and lowering the rates depending on 
     how much money the bank needs. ``We could raise $10 million 
     overnight if we had to,'' Mr. Stone said.
       Industry experts say they expect the current trend of 
     declining deposit growth and increasing loan demand to 
     continue. ``I don't see any real relief for community 
     banks,'' said Charles N. Cranmer, head of equity research at 
     M.A. Schapiro & Co. in New York. ``You've got a banking 
     population that's been educated that they can do better 
     things with their money than put it in a bank.''
                                 ______