[Congressional Record Volume 145, Number 29 (Wednesday, February 24, 1999)]
[Senate]
[Pages S1936-S1938]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HAGEL (for himself, Mr. Bayh, Mr. Lott, Mr. Bennett, Mr. 
        Grams, Mr. Kerrey, Mr. Johnson, Mr. DeWine, Mr. Conrad, Mr. 
        Inhofe, Mr. Murkowski, Mr. Brownback, Mr. Bryan, Mr. Roberts, 
        and Mr. Burns):
  S. 458. A bill to modernize and improve the Federal Home Loan Bank 
System, and for other purposes; to the Committee on Banking, Housing, 
and Urban Affairs.


        FEDERAL HOME LOAN BANK SYSTEM MODERNIZATION ACT OF 1999

  Mr. HAGEL. Mr. President, I rise today to introduce the Federal Home 
Loan Bank System Modernization Act of 1999. I am joined in this effort 
by my distinguished colleagues Senators Bayh, Lott, Bennett, Grams, 
Kerrey, Johnson, DeWine, Conrad, Inhofe, Murkowski, Brownback, Bryan, 
Roberts, and Burns. While we've made a few improvements, this is 
essentially the same legislation I introduced during the 105th 
Congress.
  The bill has the formal support of the American Bankers Association, 
the Independent Bankers Association of America, America's Community 
Bankers, the Council of Federal Home Loan Banks, and the National 
Association of Home Builders. Equally important, we have the support of 
the regulator, the Federal Housing Finance Board.
  The bill's main objective is to strengthen local community banks that 
are vital to the economic growth and viability of our communities. The 
Federal Home Loan Bank System Modernization Act of 1999 would ensure 
that, in an era of banking megamergers, smaller banks are able to 
compete effectively and continue to serve their customers' lending 
needs.
  Community banks are finding that, for a variety of reasons, their 
funding sources are shrinking. This makes it more difficult to fund the 
loan demands in their communities. During the 1980s in my state of 
Nebraska--as in much of America--many community banks and thrifts 
closed. As local credit dried up, local economies stagnated. Small 
businesses, our greatest engines for job growth, were the first to feel 
the crunch.
  The Federal Home Loan Bank System Modernization Act of 1999 
strengthens community banks in order to avoid a repeat of the 1980s. By 
ensuring the viability of the community bank and thrift, our bill will 
keep credit flowing to small businesses, farmers, and potential 
homeowners--and help our local communities to thrive as we enter the 
21st Century.
  There is plenty of evidence that small banks are facing growing 
deposit pressures. This problem has two causes: First, banks and 
thrifts are competing for deposits with brokerage firms and mutual 
funds--and local institutions are losing. That means that deposits that 
used to go to local institutions and were used for local lending are 
now going to major financial institutions outside the community.
  Second, we have an aging population in many rural communities. When a 
farmer dies, his inheritance goes to his children--who often have left 
the community. That means money flows out of the community--out of 
local financial institutions--and is no longer available for local 
economic development.
  These two factors mean less deposits in local banks. That means less 
local capital available for local loans. Less economic development. 
Less opportunity. And this problem won't fix itself--most of these 
local institutions are too small to go to the capital markets on their 
own.
  This is where the Federal Home Loan Banks can make a real difference. 
The Home Loan Banks can be a critical source of liquidity for community 
banks and thrifts. I tend to focus on rural America because that is 
where I come from--but liquidity problems can be equally serious in 
urban areas. The Federal Home Loan Banks are an important tool for 
providing credit to consumers no matter where they live.
  A related problem our bill addresses is government subsidized 
competition with the private sector. Commercial banks compete with 
credit unions that pay no taxes and, therefore, have a lower cost of 
funding. The same can be said of the Farm Credit System. Its connection 
to the federal government gives it a funding advantage over commercial 
banks. The purpose of this legislation is not to drive the Farm Credit 
Banks or credit unions out of business--they play a vital role in our 
country. The purpose is to allow the

[[Page S1937]]

Federal Home Loan Banks to help level the playing field for commercial 
banks and thrifts that must compete with these entities.
  I want to provide you with a real world example: the case of 
Commercial State Bank in Wausa, Nebraska. 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 can't 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 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's what this bill is all about--helping 
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 five main components:
  First, 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 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. The Congressional Budget Office has indicated 
this change could bring in an additional $795 million over ten years to 
the U.S. Treasury. In other words, we have protected the taxpayer from 
picking up any additional cost of the S&L bailout.
  Fourth, 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. In fact, they follow the 
recommendations of a recent General Accounting Office study.
  Finally, this legislation reforms the capital structure of the 
Federal Home Loan Bank system. Current law (established in 1932) 
dictates that the level of FHLBank capital is determined by the size 
and mix of a FHLBank's member assets, not by any rational capital 
standards. The result is the FHLBanks' capital levels don't reflect the 
risk profile of their lending activities. Furthermore, the FHLBanks' 
capital lacks permanence because it is withdrawable by members upon 
termination of their membership.
  Our bill changes the existing capital rules to include a risk-based 
capital requirement and a permanent capital requirement which ensures 
the FHLBanks maintain capital levels appropriate to the risk of their 
business activities. The new plan also encourages the FHLBanks to build 
up their retained earnings which act as an additional buffer and 
protection to the U.S. taxpayer.
  Mr. President, it's 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 grateful to Senator Bayh, the 
principal cosponsor of the legislation, for his help in this endeavor. 
I am also grateful to the other cosponsors who have lent their names to 
this effort. Today, Congressmen Baker and Kanjorski are introducing the 
companion bill in the House of Representatives. Both are tireless 
proponents for Federal Home Loan Bank modernization and 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. BAYH. Mr. President, I rise this afternoon to join with my 
colleague Senator Hagel to introduce the Federal Home Loan Bank System 
Modernization Act of 1999. We are joined in this endeavor by Senators 
Lott, Kerrey, Bennett, Bryan, Johnson, Grams, Conrad, Burns, Brownback, 
DeWine, Murkowski, Roberts, and Inhofe.
  Let me begin by expressing my thanks and appreciation to Senator 
Hagel for spearheading this reform effort over the past two years. The 
Home Loan Bank System is not something that is on the lips of every 
Senator or every constituent and I commend him for mastering this 
difficult subject and for devising some changes that will allow this 
somewhat-obscure system to have a tangible positive impact upon the 
lives of people who might not even be aware that the system exists.
  Mr. President, the core element of our legislative proposal today 
would be to allow community banks--defined as those institutions with 
assets of less than $500 million--to access the low cost capital of the 
Home Loan Bank System in order to make loans to small businesses, 
farmers and other types of loans that benefit their community.
  These small banks generally serve rural communities and small cities. 
The plain fact is that while, overall, the national economy is robust, 
there is still demand for credit and capital in rural communities that 
cannot be met by the existing financial structure. These communities, 
unfortunately, do not always attract the attention of the large banks 
and securities firms that have come to dominate the financial 
landscape. And since the community banks that serve these communities 
are constrained in the amount of lending they can do by the amount of 
deposits that they can raise from a limited geographic area, fueling 
economic growth requires us to develop additional sources of private 
sector funding.
  By opening up the Home Loan Bank System to these small, community 
banks, this legislation will, hopefully, not only allow the banks to 
meet the

[[Page S1938]]

loan demand of their town or small city, but will also have the added 
effect of keeping interest rates down--or even lowering those rates--
for these kind of loans.
  Let me also emphasize, Mr. President, that these benefits will accrue 
to these communities without a single dime of taxpayer money. Making 
these changes to the Home Loan Bank System frees up access to capital 
using existing private sector mechanisms.
  Mr. President, let me briefly outline why it is necessary for 
Congress to modernize the Federal Home Loan Bank System, and why 
opening up the system to these small banks is consistent with the 
mission that Congress endowed the system with in 1932.
  The Federal Home Loan Bank System was created in 1932 to serve as a 
public/private mechanism that would both regulate the thrift (S&L) 
industry and would help the industry obtain low-cost capital for the 
purpose of making home mortgages (at the time, the primary mission of 
Savings & Loans). Borrowing by the individual home loan banks is backed 
by the full faith and credit of the US Government, thus allowing them 
to borrow at the lowest possible rates. In turn, the bank makes that 
money available to its members in the form of ``advances.''
  In 1989, as part of the clean-up of the S&L crisis, the Home Loan 
Bank System was dramatically changed. It was stripped of its regulatory 
authority (which was transferred to the newly created Office of Thrift 
Supervision) and of its authority to administer the deposit insurance 
fund (called FSLIC at the time and which was transferred to the FDIC 
which now administers the SAIF). The banks retained authority to 
provide low-cost capital to the thrift industry, though membership was 
also opened up to commercial banks. A Federal Housing Finance Board was 
created specifically to make sure that the activities of the 12 banks--
which were still controlled by their members--conformed to safety and 
soundness regulations.
  The Banks were also required to buy REFCORP bonds. As a result, the 
banks must pay a total of $300 million each year out of their earnings. 
The banks must also pay $100 million each year as part of the 
Affordable Housing Program. The REFCORP formula required a payment of a 
certain percentage of each banks annual earnings; if that failed to 
meet the annual $300 million payment, a further allocation system went 
into place with the heaviest burden placed on those banks with the 
greatest number of S&L failures.
  This legislation keeps in place all of the safety and soundness 
regulations put into place by FIRREA and FDICIA. But it would reform 
some of the basic management of the individual banks so that basic 
administrative decisions are placed in the hands of the men and women 
running the bank, rather than emanating from the Finance Board here in 
Washington. The bill also seeks to rationalize the capital structure of 
the individual banks so that the need to engage in non-advance 
investments is reduced and so that banks' capital reserves are secured 
by permanent--rather than tradeable--stock.
  With the rise of the secondary mortgage market--primarily driven by 
Fannie Mae and Freddie Mac--and the entry of other entities like 
mortgage brokers into the mortgage market, many people have been 
looking for ways to allow the banks to play a more relevant role in 
today's society. Expanding the Home Loan Banks ability to provide low-
cost capital to the smallest banks in principally rural areas is both a 
benefit to the banks and to communities that are still experiencing a 
credit crunch.
  In 1932, Congress correctly surmised that creating funding for 
housing was the cornerstone of rebuilding towns, villages and cities 
gripped in the vise of the Great Depression. Today, with the housing 
market flush with capital, it is appropriate for Congress to use this 
longstanding tool of community development--the Federal Home Loan Bank 
System--to address the pressing and serious capital needs of rural 
America.
  I urge my colleagues to join with Senator Hagel and myself to work 
towards enactment of this important legislation.
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