[Federal Register Volume 66, Number 192 (Wednesday, October 3, 2001)]
[Proposed Rules]
[Pages 50366-50375]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-24588]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Chapter IX

[No. 2001-21]
RIN 3069-AB09


Multiple Federal Home Loan Bank Memberships

AGENCY: Federal Housing Finance Board.

ACTION: Solicitation of comments.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is 
soliciting comments on the implications for the Federal Home Loan Bank 
System (FHLBank System) raised by the structural changes that have been 
occurring in its membership base. This solicitation has been prompted 
by the submission of several petitions, each requesting that the 
Finance Board permit a single depository institution to become a member 
of two Federal Home Loan Banks (FHLBanks) concurrently. The petitions 
also raise a number of other broad issues affecting the FHLBank System. 
The Finance Board has decided to afford all interested parties an 
opportunity to provide comments.

DATES: Comments must be received in writing on or before January 2, 
2002.

ADDRESSES: Interested persons should submit their data, views, 
opinions, and comments to: Elaine L. Baker, Secretary to the Board, 
Federal Housing Finance Board, 1777 F Street, NW., Washington, DC 
20006, or to [email protected]. Comments will be available for public 
inspection at this address.

FOR FURTHER INFORMATION CONTACT: James L. Bothwell, Managing Director, 
(202) 408-2821; Scott L. Smith, Acting Director, (202) 408-2991, Office 
of Policy, Research and Analysis; Arnold Intrater, Acting General 
Counsel, (202) 408-2536, Neil R. Crowley, Deputy General Counsel, (202) 
408-2990, Sharon B. Like, Senior Attorney-Advisor, (202) 408-2930, 
Office of General Counsel, Federal Housing Finance Board, 1777 F 
Street, NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION: To assist interested parties in responding 
to the questions posed in this notice and in understanding how these 
issues may affect the FHLBank System, Part I of this notice provides an 
overview of the establishment of the FHLBank System, how the FHLBank 
System has evolved over the years, and its current structure.

I. Background

A. Establishment of the FHLBank System

    The FHLBank System was created in 1932 by the Federal Home Loan 
Bank Act (Bank Act), (12 U.S.C. 1421 et seq). The Bank Act was a 
response to the financial crises of the Great Depression and, in 
particular, to an urgent need at that time for a central credit 
facility for thrift institutions that would help to ensure the 
availability of funds for home financing. Before the enactment of the 
Bank Act, thrift institutions did not have a national regulator, but 
were subject only to state-level regulation. Further, thrifts, which 
evolved from neighborhood cooperative home-financing societies into 
variously named associations (building and loan associations, savings 
and loan associations, cooperative banks, homestead banks, and mutual 
savings banks), lacked an efficient means to balance funding supply and 
demand, both at the level of the institution and across regions.
    The Bank Act established the Federal Home Loan Bank Board (FHLBB), 
and authorized the FHLBB to create and oversee from eight to 12 
FHLBanks to bolster the ailing thrift industry by lending money to 
thrifts and other mortgage lenders.\1\ The Bank Act provided that 
FHLBank districts were to be ``apportioned with due regard to the 
convenience and customary course of business of the institutions 
eligible to and likely'' to join, and that ``no [FHLBank] district 
shall contain a fractional part of any State.'' (See 12 U.S.C. 1423.) 
The FHLBB created 12 FHLBanks, determined their locations and drew 
their boundaries, all as authorized in the Bank Act. Each FHLBank 
served members located within its geographic district, which was made 
up of between two and eight states. (See 12 U.S.C. 1423.)
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    \1\ The twelve FHLBanks that were created are ``government-
sponsored enterprises'' (GSEs), organized under the authority of the 
Bank Act, 12 U.S.C. 1423, 1432(a), i.e., they are federally 
chartered but privately owned institutions created by Congress to 
support the financing of housing and community lending by their 
members. See 12 U.S.C. 1422a(a)(3)(B)(ii), 1430(i), (j) (1994). By 
virtue of their GSE status, the FHLBanks are able to borrow in the 
capital markets at favorable rates. The FHLBanks then pass along 
that funding advantage to their members--and ultimately to 
consumers--by providing advances (secured loans) and other financial 
services to their members (principally, depository institutions) at 
rates that the members generally could not obtain elsewhere.
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    As originally enacted in 1932, the Bank Act authorized any eligible 
institution to become either a ``member'' or a ``nonmember borrower'' 
of a FHLBank, and further provided:


[[Page 50367]]


An institution eligible to become a member or a nonmember borrower 
under this section may become a member only of, or secure advances 
from, the [FHLBank] of the district in which is located the 
institution's principal place of business, or of the [FHLBank] of a 
district adjoining such district, if demanded by convenience and 
then only with the approval of the [Finance] Board.

    (See 12 U.S.C. 1424(a), (b)).\2\ In response to questions raised 
during the Senate hearings on the Bank Act about how insurance 
companies with mortgage lending operations throughout the country would 
access the FHLBank System, the principal drafter of the Bank Act stated 
the ``theory'' of the bill as follows:
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    \2\ Section 6(e) of the Bank Act provided a limited transition 
period during which ``nonmember borrowers,'' institutions that 
otherwise were eligible for FHLBank membership but lacked the legal 
authority under state law to invest in equity securities (and thus 
could not invest in FHLBank stock), could obtain FHLBank advances 
without becoming members. See 12 U.S.C. 1426(e).

    [I]t was not the desire, say, for members in South Carolina to 
borrow of a New York bank, because it would mean too great a 
concentration at the New York bank. If the New York bank happened to 
do better than a South Carolina bank, all members would go there. 
There is the opportunity in the bill for a member whose principal 
place of business is in one district to belong to a bank in the 
adjoining district, but outside of that there is no provision. It is 
impossible under the terms of the bill for a company doing business 
in New York to belong to a South Carolina bank.\3\
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    \3\ See Hearings Before A Subcommittee of the Committee on 
Banking and Currency on S. 2959 (Creation of a System of Federal 
Home Loan Banks), U.S. Senate, 72nd Cong., 1st Sess. (1932), at 116-
117, 359-360.

    By requiring the FHLBank districts to include only whole states, 
the Bank Act created the possibility that some institutions would not 
be able to join the FHLBank that was the most convenient for them, even 
though the district had been established based on the ``convenience and 
customary course of business'' standard. The original bill considered 
by Congress in 1932 would have allowed an institution unilaterally to 
choose to join a FHLBank in an adjoining district, with no restriction 
placed on this right. That language raised concerns that an institution 
could become a member of an adjoining district irrespective of the 
distance between the applicant and the FHLBank of the adjoining 
district. During the House hearings, a change was proposed to section 
4(b) of the Bank Act, and ultimately incorporated into the final 
legislation, to allow adjoining district membership only ``if demanded 
by convenience and then only with the consent and approval of the 
[B]oard.'' See Hearings Before A Subcommittee of the Committee on 
Banking and Currency on H.R. 7620 (Creation of a System of Federal Home 
Loan Banks) , U.S. House of Representatives, 72nd Cong., 1st Sess. 
(1932), at 199.
    A related statute, the Home Owners' Loan Act of 1933 (HOLA), was 
enacted one year after the Bank Act and, in providing for the 
chartering of federal savings and loan associations, stated that:

    Each such [federal savings and loan] association, upon its 
incorporation, shall become automatically a member of the [FHLBank] 
of the district in which it is located, or if convenience shall 
require and the Board approve, shall become a member of a [FHLBank] 
of an adjoining district. Such associations shall qualify for such 
membership in the manner provided in the [Bank Act] with respect to 
other members.

    12 U.S.C. 1464(f). The House Report on the HOLA incorporated all of 
section 4 of the Bank Act into its Report and stated that the bill, 
apart from other minor changes, ``does not otherwise disturb the 
functioning of the [FHLBank] System.'' H.R. Rep. No. 55, 72nd Cong., 
1st Sess. at 1 (April 25, 1933).
    The Bank Act further provided that an institution eligible for 
membership could become a member of a FHLBank if the institution 
satisfied certain criteria and purchased a specified amount of the 
FHLBank's capital stock. (See 12 U.S.C. 1424, 1426.) The FHLBank System 
was designed to be a cooperative, in that only members could borrow 
from the FHLBanks, and all FHLBank profits were to be distributed back 
to the members in the form of lower loan rates (advance prices) or 
through dividends on purchased shares. The Bank Act further authorized 
the FHLBanks to raise funds by selling bonds, which, in keeping with 
the cooperative nature of the FHLBank System, would be the joint and 
several obligations of all of the FHLBanks in the FHLBank System.

B. Regulatory and Industry Developments

    When the FHLBank System was established, its membership base was 
largely confined to the thrift industry, which consisted of nearly 
11,000 thrift institutions. Each such institution conducted business 
primarily, if not exclusively, in the community in which it was based. 
In 1932, thrift institutions tended to be small, with assets per thrift 
averaging just $7.7 million (in 1999 dollars). By comparison, the newly 
established FHLBanks were much larger, commencing their operations with 
$125 million (nearly $1.4 billion in 1999 dollars) of capital provided 
by the U.S. Treasury, which received in return 125,000 shares of 
FHLBank stock.\4\
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    \4\ The FHLBanks also raised capital by selling stock to their 
members. The Bank Act required the FHLBanks to begin repurchasing 
the stock from the U.S. Treasury loan once the amount of stock 
issued to their members equaled the initial $125 million provided by 
the U.S. Treasury. The FHLBanks began to repurchase stock from the 
Treasury in 1948 and completed the repurchases in 1951. Since that 
time, all FHLBank stock has been held exclusively by the members of 
the FHLBanks.
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    Since 1932, the size and nature of the membership base of the 
FHLBank System has changed significantly, principally as a result of 
numerous statutory amendments, regulatory changes and industry 
innovations affecting the banking industry generally, and the thrift 
industry and the FHLBank System in particular. By 1989, the number of 
thrift institutions had declined to 3,087 (correspondingly, the FHLBank 
System had 3,177 members at that time) and increased in average asset 
size to nearly $582 million (in 1999 dollars). At the same time, 
regulatory changes were allowing thrift institutions to engage in lines 
of business that historically had been restricted to commercial banks. 
The increasing similarity of the two types of depository institutions 
provided, in part, a rationale for the amendments to the Bank Act in 
1989 that allowed commercial banks to become members of the FHLBank 
System. This change in membership eligibility has resulted in a 
substantial increase in FHLBank System membership, which currently 
exceeds 7,800 members. As of June 30, 2001, commercial banks accounted 
for 73 percent of FHLBank System membership, 45 percent of its capital, 
and 40 percent of total advances outstanding.
    Though the thrift industry had been consolidating since the 1930s, 
the number of commercial banks had changed little until the regulatory 
changes that began in the early 1980s. These regulatory changes 
accelerated the ongoing consolidation of the banking industry as a 
whole. From the early 1930s to 1982, the number of depository 
institutions declined from over 25,000 to 17,869. The rate of decline, 
however, increased between 1982 and 1992 (after the Garn-St Germain 
Act) and again between 1992 and 2000 (after the Office of Thrift 
Supervision (OTS) eased its branching policy for federal savings 
associations) so that by December 31, 2000, the number of commercial 
banks and thrift institutions totaled just 9,905. The consolidation 
also has served to increase the average asset size of these depository 
institutions. As of December 2000, they held, on average, assets of

[[Page 50368]]

over $700 million, up from $373 million in 1992 and from $272 million 
in 1982 (valued in 1999 dollars).\5\
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    \5\ For the source of information regarding the average asset 
sizes, see: FDIC, ``Historical Statistics on Banking,'' at http://www2.fdic.gov/hsob/. Two other statistics offer evidence of 
consolidation: First, between 1980 and 1998, the share of commercial 
bank assets held by the top 100 commercial banks rose from 46.8 
percent to 70.9 percent. Second, the substantial rise in average 
asset size since 1982 came in spite of the fact that the median 
asset size has remained relatively stable. A rising mean asset size 
relative to median asset size is evidence of increased concentration 
at the high end of the distribution.
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    An essential part of the consolidation process has been the gradual 
dismantling of interstate banking restrictions. The Riegle-Neal 
Interstate Banking and Branching Efficiency Act of 1994 lifted the last 
of the national interstate branching prohibitions, completing the 
process of dismantling the interstate banking restrictions that had 
been occurring on a piecemeal basis, on both a national and a state 
level.\6\ A depository institution now has the ability to operate 
across state lines, and may do so by establishing de novo branch 
offices in other states (subject to certain state law restrictions) or 
by assimilating the out-of-state offices of another depository 
institution into its own branch network.
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    \6\ Historically, the FHLBB permitted federal savings and loan 
associations to branch only within the state in which they 
maintained their home office, although in 1981 the FHLBB amended its 
branching policy to permit limited interstate branching in 
connection with the resolution of failing savings and loan 
associations. 12 CFR 556.5(a)(3) (1982). The Garn-St Germain 
Depository Institutions Act of 1982 expanded the authority to allow 
interstate branching in connection with the acquisition of failed 
savings and loan associations, and also allowed failed commercial 
banks to be acquired by out-of-state bank holding companies. Pub. 
Law No. 97-320, Sec. 116, Sec. 123, 96 Stat. 1469 (Oct. 15, 1982). 
The Financial Institutions Reform, Recovery, and Enforcement Act of 
1989 (FIRREA) allowed out-of-state commercial banks to acquire 
healthy savings associations, Pub. Law No. 101-73, Sec. 601, 103 
Stat. 183, 408 (Aug. 9, 1989), and, in 1992, the OTS allowed 
interstate branching for all federal savings associations. See 12 
CFR 556.5 (1993). The Riegle-Neal Interstate Banking and Branching 
Efficiency Act of 1994 authorized commercial banks, as of June 1, 
1997, to establish interstate branch offices, which allowed 
affiliated banks in different states to consolidate into one bank 
charter with interstate offices, and allowed banks greater authority 
to engage in interstate mergers and acquisitions. Pub. Law No. 103-
328, Sec. 102, 108 Stat. 2338, 2343 (Sept. 29, 1994).
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C. Current Environment

    Currently, each member of the FHLBank System is a member solely of 
the FHLBank in the district in which the member maintains its principal 
place of business. No single institution is a member of more than one 
FHLBank, although certain holding companies do own separate 
subsidiaries that are members of different FHLBanks. The consolidation 
in the banking industry, however, has affected the membership of the 
FHLBanks. For example, most FHLBanks now have one or two members that 
are disproportionately large. For example, as of March 31, 2001, 2000, 
six of the 12 FHLBanks had one or more members that accounted for at 
least 20 percent of the FHLBank's total advances outstanding, and nine 
of the FHLBanks had at least one member that was larger, in terms of 
asset size, than the FHLBank itself. Furthermore, a substantial portion 
of FHLBank activities is with members, particularly large members, that 
have a multi-district presence. The presence of both large members and 
members that conduct business in other FHLBank districts has the 
potential to affect the operations of the FHLBanks and the FHLBank 
System.
1. Large Members
    Large financial institutions that are FHLBank System members tend 
to be large users of FHLBank services, in part, to support their 
housing finance activities nationwide. In fact, of the top 50 mortgage 
originators nationwide during 1999, 14 were FHLBank members, and an 
additional 28 had affiliates that could provide them with indirect 
access to FHLBank services. Together, FHLBank members and their 
affiliates accounted for over 44 percent \7\ of single-family mortgage 
originations in 1999. As continued consolidation will result in an 
increasing number of ever-larger members, the potential for such 
members to affect the pricing, operations, and stability of the FHLBank 
System will also increase.
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    \7\ Based on Home Mortgage Disclosure Act data. Represents 
percent of loans originated (conventional single-family purchases 
and refinancings).
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    One concern associated with large members is that they have the 
potential to cause rapid and substantial swings in the volume of 
advances and other services at their FHLBank. The large members (with 
principally short-term advances) can affect such volume changes because 
they have alternative funding sources, such as access to the capital 
markets, and they can make business decisions, such as merging, 
consolidating, or relocating, that affect the degree of business they 
conduct with their FHLBank. To the extent that a FHLBank seeks to avoid 
significant swings in business activity, the large member is positioned 
to achieve price or other concessions from that FHLBank.
    Even though a large member has the potential to cause large 
fluctuations in a FHLBank's earnings and asset base, there are other 
factors that may lessen the likelihood of a large member actually 
having such an effect on the policies of an individual FHLBank. First, 
the flexible capital structure and low fixed costs of the FHLBanks 
allow them to expand or contract their balance sheets with relatively 
little effect on their ability to service remaining members in a manner 
consistent with the public purpose of the FHLBank System.\8\ As 
evidence of this flexibility, nine of the 12 FHLBanks could lose their 
largest member in terms of advances and still have assets in excess of 
that of the smallest FHLBank. Second, the cooperative structure of the 
FHLBank System, where all members own shares in their FHLBank, reduces 
the incentive for members to bargain for concessions from their own 
FHLBank, because such concessions, to the extent they depress the 
profitability of the FHLBank, will be reflected in lower dividends, 
higher future advance rates, or reduced services from the FHLBank to 
all members. Third, the Bank Act limits the ability of a member to 
obtain concessions from its FHLBank. Specifically, section 7(j) of the 
Bank Act requires the directors of the FHLBanks to administer the 
affairs of their FHLBank fairly and without discrimination in favor of 
or against any member borrower. (See 12 U.S.C. 1427(j).) The FHLBanks, 
therefore, may not offer a price concession to a large member (except 
for volume and risk-related discounts) without also making it available 
to all other members. (See 12 CFR 950.5(b)(2).) In addition, existing 
law limits the number of votes any one member can cast for a FHLBank 
director from its state to the average number of shares of FHLBank 
stock required to be held by all members in that state, effectively 
limiting the ability of large members to control the election of 
FHLBank directors.
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    \8\ The mission of the FHLBanks is to provide to their members 
and housing associates financial products and services, including, 
but not limited to advances, that assist and enhance such members' 
and housing associates' financing of: (a) Housing, including single-
family and multi-family housing serving consumers at all income 
levels; and (b) community lending. (See 12 CFR 940.2).
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    Another concern raised by the advent of large members in the 
FHLBank System is that such members may present a concentration of 
credit risk, as a small number of members may account for a large 
percentage of the FHLBank's advances or other activities. Such 
concentration of credit risk could subject the FHLBank to losses of a 
significant magnitude if these members were to experience substantial 
financial

[[Page 50369]]

difficulties. To some extent, the existence of large member 
institutions means that such concentrations of credit risk are 
inevitable. The risks to any one FHLBank, however, are limited by 
several features of the FHLBank System. First and foremost, advances 
and most other activities are secured by the member's collateral, which 
lessens the likelihood of a FHLBank incurring a loss. In fact, the 
FHLBank System has never experienced a credit loss from such activity 
with its members. Second, the FHLBanks have proven to be quite flexible 
in responding to fluctuations in membership. In particular, different 
FHLBanks have endured, with little or no consequences, instances where 
large members have withdrawn from membership or significantly reduced 
their activity with the FHLBank. Finally, because the consolidated 
obligations for which one FHLBank is the primary obligor also are the 
joint-and-several liabilities of all the FHLBanks, the risks to any one 
FHLBank are effectively backed by the full capital base of the FHLBank 
System.
    Another concern associated with large member institutions and their 
potential to alter significantly the volume of their activities within 
any one FHLBank is that such actions may have consequences for the 
Affordable Housing Program (AHP). Through the AHP, the FHLBanks provide 
subsidies to members for the funding of affordable owner-occupied and 
rental housing projects.\9\ Because the amount of AHP funds available 
in any given year depends on the net income of each FHLBank, some 
parties have expressed concern that the withdrawal of a large member 
would cause the FHLBank's earnings, and therefore AHP funding, to be 
reduced. Even if a large member's withdrawal from membership were to 
have that effect on a given FHLBank, if that member were to become a 
member of another FHLBank, the total AHP funding for the FHLBank System 
may be unaffected. Specifically, reduced funding associated with the 
decreased earnings of the one FHLBank are likely to be matched by the 
increased funding associated with the higher earnings of the other 
FHLBank. Nonetheless, the geographic distribution of funding among 
FHLBanks could be significantly altered.
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    \9\ See 12 U.S.C. 1430(j)(1). Section 10(j)(5) of the Bank Act 
provides generally that each FHLBank shall contribute annually to 
its AHP 10 percent of the FHLBank's net earnings for the previous 
year. If the aggregate amount of such payments is not at least $100 
million, each FHLBank must contribute to its AHP its pro rata share 
of $100 million. See 12 U.S.C. 1430(j)(5). The Finance Board's 
implementing AHP regulation requires each FHLBank to establish a 
competitive scoring process, subject to overall eligibility 
requirements and scoring parameters set forth in the AHP regulation, 
for awarding of the FHLBank's AHP funds to its members. See 12 CFR 
951.5(b), 951.6(b). Members apply to the FHLBank of which they are a 
member for AHP funds on behalf of sponsors of specific housing 
projects.
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2. Members With a Multi-District Presence
    In varying degrees, some members now have the ability to operate in 
more than one FHLBank district, and engage in business with more than 
one FHLBank. As with large members, the presence of members with multi-
district activities has the potential to affect the pricing, 
operations, and stability of the FHLBanks and the FHLBank System. Such 
effects could arise because some multi-district activities create the 
potential for competition among the FHLBanks for member business that 
was not contemplated when Congress created the FHLBank System. 
Depending on the nature of such competition, it might either contribute 
to the efficient achievement of the FHLBank System's housing finance 
mission, or undermine the cooperative nature of the FHLBank System. 
Allowing concurrent membership in more than one district for a single 
institution would amount to redefining the rules governing multi-
district activity for such members, and perhaps increase the 
opportunity for other members to engage in multi-district activity, 
thus potentially increasing the competitive pressures facing the 
FHLBanks.
    Certain members already conduct a significant amount of business 
activity across district lines. This activity occurs through a number 
of channels. The only way for a member to achieve something comparable, 
in terms of member access and benefits, to concurrent memberships in 
multiple FHLBanks, under current rules, is through the holding company 
structure, where two or more subsidiaries of a holding company are each 
a member of a different FHLBank. Holding companies can cause their 
subsidiaries to shift or pledge assets among themselves, regardless of 
their location or membership status. This flexibility affords these 
holding companies the ability to ``FHLBank shop'' to obtain more 
favorable prices for FHLBank services. Such FHLBank shopping puts the 
FHLBanks in competition with each other, which was not contemplated 
when Congress created the FHLBank System. The potential for such 
competition is significant given the number of holding companies in the 
FHLBank System. Currently, 72 percent of members are subsidiaries of 
holding companies.\10\ Moreover, 104 depository institution holding 
companies have subsidiaries that are members of different FHLBanks. The 
subsidiaries of those holding companies account for 36 percent of total 
FHLBank System advances outstanding. Furthermore, going forward under 
the new capital structure required by Gramm-Leach-Bliley Act, Public 
Law 106-102, 133 Stat. 1338 (Nov. 12, 1999) (GLB Act), FHLBank shopping 
may not be limited to prices for services. Specifically, because the 
GLB Act does not require all FHLBanks to have the same stock purchase 
requirements, a FHLBank could attempt to compete for certain members' 
business by setting stock purchase requirements that are more favorable 
to those members. Although Finance Board approval will be necessary 
before implementing any capital plan, FHLBanks have expressed a desire 
for the flexibility to adjust their stock purchase requirements within 
reasonable ranges. If approved, each FHLBank would have an ability to 
set those requirements in such a way as to attract the business of 
members with multi-district access or concurrent memberships.
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    \10\ Many of these are the only subsidiary of unitary bank or 
unitary thrift holding companies.
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    Currently, a holding company structure allows the company to secure 
the benefits of membership in two or more FHLBanks through its member 
affiliates. In recent years, the consolidation of the banking industry 
and the passage of the Riegle-Neal Interstate Banking and Branching 
Efficiency Act of 1994 have induced many banking companies to adopt an 
interstate branch structure, rather than operate with numerous banking 
subsidiaries. An institution with an interstate branch network is 
currently not permitted membership in more than one FHLBank. 
Consequently, this situation has prompted several members that have 
acquired members of other FHLBanks through a merger to seek permission 
to become a member of the FHLBank of the merged member, or to continue 
the membership of the merged member, so that it may obtain the benefits 
of membership in more than one FHLBank without having to maintain 
separate banking subsidiaries. More requests for concurrent membership 
by single institutions could arise, given the prevalence of members 
with geographically dispersed branch networks. As of June 30, 2000, 188 
of the FHLBank System's 7,205 bank and thrift members had branch 
offices in more than one FHLBank district. These members accounted for 
37 percent of

[[Page 50370]]

total deposits in all member commercial banks and thrifts.
    Although subject to limits, there are other means by which members 
can access the services of more than one FHLBank. For example, certain 
members currently obtain unsecured credit from FHLBanks of which they 
are not members. Finance Board policies permit the FHLBanks to extend 
short-term unsecured credit to eligible counterparties, but restrict 
those counterparties to institutions that are in the banking, housing, 
finance, or securities industries. The Finance Board also imposes 
credit-quality restrictions on a FHLBank's extensions of unsecured 
credit. Nothing in the Bank Act or in the Finance Board's regulations 
or policies, however, requires an eligible counterparty to be a member 
of the FHLBank extending the unsecured credit. Thus, a member may 
obtain limited amounts of unsecured loans (typically, federal funds) 
from its own FHLBank, as well as from other FHLBanks. The unsecured 
credit market is thus an area where FHLBanks already have the potential 
to compete with one another. As of August 31, 2001, 80 percent of the 
unsecured credit outstanding from the FHLBanks to members had been 
extended by FHLBanks to members of other FHLBanks.
    The FHLBanks' AHPs provide another way that member activities can 
reach across FHLBank districts. Over the 10-year history of the AHP, 8 
FHLBanks have provided AHP funds to their members to support 118 out-
of-district AHP projects, which represents approximately 2.4 percent of 
total AHP funds. This percentage has been higher in recent years, 
reaching 5.7 percent in 1999 and 3.3 percent in 2000. The AHP 
regulation gives a FHLBank the discretion to prohibit the use of its 
AHP funds to support out-of-district projects. See 12 CFR 
951.5(b)(10)(i)(B).\11\ Nonetheless, all but two of the FHLBanks 
currently permit such out-of-district funding.
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    \11\ During the AHP rulemaking process, commenters indicated 
that there were both advantages and disadvantages to allowing 
FHLBanks to adopt prohibitions on funding of out-of-district 
projects. Accordingly, the Finance Board determined to leave the 
decisions on whether to adopt such prohibitions to the discretion of 
each FHLBank, in consultation with its Advisory Council.
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    Finally, member assets may be spread among FHLBank districts as a 
result of inter-FHLBank operations. For example, advances and acquired 
member assets (AMAs) can be sold or ``participated'' between and among 
the FHLBanks.\12\ Although the sale or participation of advances is 
relatively uncommon, currently more than half of the total outstanding 
balance of AMAs has been participated by the acquiring FHLBanks to 
other FHLBanks.
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    \12\ All 12 FHLBanks have established various member mortgage 
asset programs to assist their members. The programs all involve the 
investment by the FHLBank in loans originated by members.
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    Although not all multi-district activities translate into greater 
competition among the FHLBanks, for those that do, there are a number 
of factors that mitigate the extent of such competition among FHLBanks. 
Specifically, FHLBanks are required to apply standards and criteria for 
evaluating member advances consistently and without discrimination. 
Thus, FHLBanks may not offer discounted pricing to a ``FHLBank 
shopper'' unless that client has creditworthiness or other 
qualifications for better terms for which all members could potentially 
qualify. Further, Finance Board regulations (12 CFR 950.5(b)) require 
that FHLBanks price their advances at or above their marginal cost of 
funds, providing a lower limit for advance prices that protects the 
FHLBanks' profitability. Finally, any such competition that could prove 
destructive would be detected and addressed by safety-and-soundness 
requirements that are enforced by annual on-site Finance Board 
examinations and off-site monitoring.
    The current inter-district activities by members have affected the 
regional franchises of the FHLBanks, in spite of the existing practice 
that allows institutions to become members of only one FHLBank. 
Modifying existing practice to allow institutions to become members of 
more than one FHLBank concurrently would likely serve to increase the 
potential competition among the FHLBanks. Nonetheless, such a 
modification may also have benefits for the stability of any one 
FHLBank. Depending on how such concurrent memberships are structured, 
they may act to limit the concentration of risks that arise when 
institutions become disproportionately large members of a single 
FHLBank. Whether such changes would promote or detract from the ability 
of the FHLBank System to achieve its public purpose is an important 
issue for consideration. Part III of this notice identifies specific 
questions on this and other issues raised in this section.

II. Petitions for Multiple FHLBank Memberships for a Single 
Depository Institution

    It is against this background of the current practice and structure 
of the FHLBank System that three FHLBanks have submitted petitions to 
the Finance Board requesting that the Finance Board permit a single 
depository institution to become a member of more than one FHLBank 
concurrently.

A. Current Rules

    Currently, each member of the FHLBank System is a member solely of 
the FHLBank in the district of which the member maintains its principal 
place of business. No single institution is a member of more than one 
FHLBank, although, as noted above, there are over 100 holding companies 
nationwide that own separate affiliates that are members of different 
FHLBanks. If a holding company that owns a member of one FHLBank 
acquires a depository institution that is a member of another FHLBank 
and then holds the two institutions as separate subsidiaries, each 
subsidiary can remain a member of its own FHLBank. If, however, the 
holding company opts to merge the two institutions, current rules 
provide that the FHLBank membership of the disappearing institution 
terminates when it is merged into the other institution.\13\ (See 12 
CFR 925.24(a).) As a result of one such merger, the Finance Board has 
been presented with an issue that it has not previously addressed, 
which is whether a single depository institution may be a member of 
more than one FHLBank at the same time.
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    \13\ The result would be the same even if no holding company 
were involved. Thus, if a member of one FHLBank were to merge into a 
member of another FHLBank, the membership of the former institution 
would terminate upon the cancellation of its charter, which 
typically occurs when the merger takes effect.
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B. Petitions for Multiple FHLBank Memberships

    On December 11, 2000, the Finance Board received from the Federal 
Home Loan Bank of Dallas (Dallas FHLBank) a petition (Petition) 
requesting that the Finance Board approve an application that would 
allow an institution that currently is a member of the Federal Home 
Loan Bank of San Francisco (San Francisco FHLBank) to become, in 
addition, a member of the Dallas FHLBank. The institution seeking dual 
FHLBank memberships, Washington Mutual Bank, FA (WMBFA), is a federal 
savings association located in Stockton, California.\14\ WMBFA applied 
for

[[Page 50371]]

membership in the Dallas FHLBank in connection with its merger with 
Bank United, a federal savings bank located in Houston, Texas, that had 
been the largest member of the Dallas FHLBank.\15\ As described above, 
upon consummation of the merger into WMBFA on February 13, 2001, Bank 
United's membership in the Dallas FHLBank terminated. Before submitting 
the Petition to the Finance Board, the Dallas FHLBank had approved the 
membership application submitted by WMBFA, contingent upon the Finance 
Board also approving the application under section 4(b) of the Bank Act 
(12 U.S.C. 1424(b)). The Finance Board published a notice of its 
receipt of the Petition, and received requests to intervene and comment 
letters from 11 parties, including five FHLBanks, two FHLBank members, 
three community development organizations, and a trade association. 
Certain of those parties have asked the Finance Board to address the 
issues associated with multiple FHLBank memberships through a 
rulemaking, rather than through an adjudication of the Petition. More 
recently, the Finance Board has received from the Federal Home Loan 
Bank of New York (New York FHLBank) a similar petition to allow Fleet 
National Bank, Providence, Rhode Island (Fleet), a member of the 
Federal Home Loan Bank of Boston, to become a member of the New York 
FHLBank as a result of its merger on March 1, 2001 with Summit Bank, 
Hackensack, New Jersey (Summit-NJ), which formerly had been a member of 
the New York FHLBank.\16\ The Finance Board also has received from the 
Federal Home Loan Bank of Chicago (Chicago FHLBank) a similar petition 
to allow Charter One Bank, F.S.B., Cleveland, Ohio (Charter One), a 
member of the Federal Home Loan Bank of Cincinnati, to become a member 
of the Chicago FHLBank as a result of its merger on July 2, 2001 with 
Liberty Federal Bank, Hinsdale, Illinois, (Liberty Federal), which 
formerly had been a member of the Chicago FHLBank.
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    \14\ As of June 30, 2001, WMBFA was the largest member of the 
San Francisco FHLBank, with approximately 43 percent of its total 
advances and 41 percent of its total capital stock. WMBFA has over 
1,126 branch offices located in California, Texas, and Florida. 
Washington Mutual, Inc., Seattle, Washington, is a savings and loan 
holding company that owns WMBFA, as well as two institutions that 
are members of the Federal Home Loan Bank of Seattle, and one that 
is a member of the Federal Home Loan Bank of Topeka.
    \15\ As of December 31, 2000, Bank United held approximately 26 
percent of the total advances and 18 percent of the total capital 
stock of the Dallas FHLBank. Bank United also had over 150 branch 
offices Texas.
    \16\ The merger also involves two other institutions, Summit 
Bank, Bethlehem, Pennsylvania, and Summit Bank, Norwalk, 
Connecticut, neither of which is revelant for FHLBank membership 
purposes.
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C. Legal Considerations

    A fundamental threshold issue is whether the Bank Act authorizes an 
institution to become a member of more than one FHLBank. For example, 
within the context of section 4(b) of the Bank Act, the question is 
raised whether an institution may become a member of more than one 
FHLBank, or whether it is simply provided an alternative, in limited 
circumstances, to become a member of a FHLBank other than the one in 
whose district it has its principal place of business. (See 12 U.S.C. 
1424(b).) Since its enactment in 1932, section 4(b) of the Bank Act has 
been amended only one time, which amendment struck from the statute 
references to ``nonmember borrowers'' that the Congress described as 
obsolete.\17\ If the Finance Board were to determine that section 4(b) 
of the Bank Act authorizes an institution to become a member of more 
than one FHLBank, the Finance Board also would have to establish 
standards for determining what constitutes ``demanded by convenience'' 
under section 4(b) for any institution that seeks membership in an 
adjoining FHLBank. In Part III of this notice, the Finance Board 
requests comment on what factors the Finance Board should consider in 
determining whether an additional membership would meet the ``demanded 
by convenience'' requirement established by section 4(b) of the Bank 
Act. As a related matter, the Finance Board also requests comment on 
how the ``demanded by convenience'' standard should be applied in the 
case of an institution that simply seeks to become a member of an 
adjoining FHLBank, i.e., in lieu of becoming a member of the FHLBank 
where it maintains its principal place of business.
---------------------------------------------------------------------------

    \17\ The House Conference Report on FIRREA, which amended the 
Bank Act in 1989, states that those nonmember borrower provisions 
were removed because they were obsolete. See H.R. Conference Report 
No. 101-222, 101st Cong., 1st Sess. at 426 (Aug. 4, 1989). FIRREA 
left intact section 5(f) of the HOLA, which separately addressed the 
adjoining district issue for federal savings and loan associations. 
It was not until the Gramm-Leach-Bliley Act of 1999 that section 
5(f) of the HOLA was amended. That amendment provided for voluntary 
FHLBank membership for federal savings associations, but made no 
reference to the adjoining district issue. Section 5(f), as amended, 
states: ``After the end of the 6-month period beginning on November 
12, 1999, a Federal savings association may become a member of the 
[FHLBank] System, and shall qualify for such membership in the 
manner provided by the [Bank] Act.'' 12 U.S.C. 1464(f).
---------------------------------------------------------------------------

D. Multiple FHLBank Membership Issues

    If the Finance Board were to permit multiple FHLBank memberships 
under the Bank Act, a number of regulatory issues would need to be 
resolved, some of which may require statutory or regulatory amendments. 
Part III of this notice identifies specific questions on these issues 
for which the Finance Board is soliciting comment. Several of these 
issues are discussed further below.
1. Membership Restrictions
    If the Finance Board were to permit multiple FHLBank memberships 
for a single depository institution under section 4(b) of the Bank Act, 
a financial institution that conducts significant portions of its 
business in different states could, in theory, become a member of 
several FHLBanks, depending on how many FHLBank districts adjoin the 
FHLBank district where the institution maintains its principal place of 
business. For example, an institution with its principal place of 
business in the Cincinnati or Dallas FHLBank districts could, in 
theory, become a member of up to six other FHLBanks. An institution 
with its principal place of business in the Des Moines FHLBank district 
could, in theory, become a member of up to five other FHLBanks. In 
contrast, an institution with its principal place of business in the 
Boston FHLBank district could become a member of only one other 
FHLBank. Such a result raises questions about the disparate treatment 
of members under the Bank Act, particularly as amended by the GLB Act, 
which was intended to equalize access to the FHLBank System for all 
members. While permitting multiple FHLBank memberships arguably could 
mitigate concerns about large member concentration in a particular 
FHLBank, the solution may be rendered more or less effective depending 
on geography. Moreover, the solution may be completely unavailable in 
the case of a merger of two members whose FHLBank districts do not 
adjoin. If membership in one FHLBank carries with it the opportunity to 
become a member of up to six other FHLBanks but membership in another 
FHLBank carries the opportunity to become a member of one or two other 
FHLBanks, then some FHLBanks and their members may be placed at a 
disadvantage relative to certain other FHLBanks and their members. Such 
disparate treatment of FHLBanks and their members could raise both 
legal and safety and soundness concerns for the Finance Board.

[[Page 50372]]

    One possible means of addressing those concerns would be to limit 
the number of FHLBanks in which any one institution could be a member. 
For example, if the Finance Board were to limit institutions to no more 
than two FHLBank memberships, then any concerns about disparate 
treatment of members based only on geography may well be moot, although 
the possibility of the member ``FHLBank shopping'' (i.e., playing one 
FHLBank against another) would remain. If the Finance Board were to 
permit an institution to become a member of more than one FHLBank, the 
Finance Board, in Part III of this notice, requests comment on how best 
to treat all members equally under the Bank Act, whether the Finance 
Board should limit the number of FHLBanks that a member may join, and 
if so, how it should structure those limits in order to discourage 
activities such as ``FHLBank shopping.''
2. FHLBank Capital Stock
    Under the existing capital stock purchase requirements, which 
remain in effect until a FHLBank implements its new capital structure 
plan under the GLB Act, each member must subscribe to an amount of 
FHLBank stock equal to the greater of 1 percent of the member's 
residential mortgage assets or 5 percent of its outstanding advances. 
(See 12 U.S.C. 1426(b)(1), (2).) As the FHLBanks implement their 
capital structure plans, that subscription formula will be replaced by 
provisions in each plan that establish a minimum stock investment for 
all members. (See 12 U.S.C. 1426(b)(1)(B), (c)(1).) Because each 
FHLBank has significant latitude in determining how to structure the 
minimum investment for its members (i.e., as a percentage of the 
member's assets, outstanding advances, or other business activity) and 
what classes of stock to issue, it is unlikely that the stock purchase 
requirements for any two FHLBanks will be identical, as is the case 
under current law.
    Under either the existing or the GLB Act capital regime, if a 
member of one FHLBank were to become a member of one or more additional 
FHLBanks, it would have to purchase some amount of the stock of each of 
the additional FHLBanks. The Bank Act does not expressly provide for a 
member to invest a lesser amount than is required by the current 
statutory formula or the minimum investment established under the 
capital plan for the FHLBank. Similarly, the Bank Act does not 
authorize a member to maintain its required investment on a 
proportionate basis, i.e., where the amount of the required investment 
is allocated among the stock of each of the FHLBanks that has admitted 
the institution to membership. Moreover, section 7(j) of the Bank Act 
requires the board of directors of each FHLBank to administer the 
affairs of the FHLBank fairly and impartially and without 
discrimination in favor of or against any member borrower. (See 12 
U.S.C. 1427(j).) That provision suggests that a reduction of the stock 
purchase requirement for the benefit of particular FHLBank members 
would not be permissible if it were to discriminate against other 
members.
    In light of the above, and if the Finance Board were to provide 
regulatory guidance on multiple FHLBank memberships, the Finance Board, 
in Part III of this notice, requests comment on how best to apply the 
existing and the GLB Act stock purchase requirements to an institution 
if it were allowed to become a member of more than one FHLBank. The 
Finance Board also requests comment on whether it should defer any 
action on the issue of multiple FHLBank memberships until after the 
capital structure plans for the FHLBanks have been implemented, 
recognizing that a determination as to how to apply the new capital 
structure in such circumstances logically should not be done until the 
contents of those plans are known.
3. Collateral Securing FHLBank Advances to Members
    Section 10(a) of the Bank Act provides generally that all advances 
from a FHLBank to members shall be fully secured by eligible 
collateral. (See 12 U.S.C. 1430(a).) Section 10(d) of the Bank Act 
provides that a FHLBank shall reserve the right to require at any time, 
when deemed necessary for its protection, deposits of additional 
collateral security or substitutions of security by the borrowing 
institution, and each borrowing institution shall assign additional or 
substituted security when and as so required. (See 12 U.S.C. 1430(d).) 
Section 10(e) of the Bank Act further provides generally that any 
security interest granted to a FHLBank by any member shall be entitled 
to priority over the claims and rights of any party, other than a bona 
fide purchaser that is entitled to priority under other law or a person 
with an actual perfected security interest. (See 12 U.S.C. 1430(e).) 
Part 950 of the Finance Board's regulations implements the provisions 
of the Bank Act on advances and collateral. (See 12 CFR part 950.)
    If the Finance Board were to permit one depository institution to 
become a member of more than one FHLBank, questions are raised as to 
how a FHLBank would ensure that its advances to a member would remain 
fully secured if that member also had obtained advances from other 
FHLBanks. In that case, each FHLBank would have the right under section 
10(d) of the Bank Act to require a member at any time to deposit 
additional collateral or to substitute collateral. Whereas the FHLBanks 
now rely in many cases on a ``blanket lien'' on a member's assets, that 
approach may not be workable where two or more FHLBanks have made 
advances to one member, unless the FHLBanks have agreed to subordinate 
their respective interests in certain assets of the member. Although 
delivery of collateral to each FHLBank also would solve these concerns, 
it could entail substantial administrative costs to both FHLBanks, 
which could affect the pricing of advances to all members. Moreover, if 
a member of more than one FHLBank were to be placed into receivership, 
the FHLBanks may well have competing claims to the same collateral 
(unless they have perfected their respective security interests), which 
may require the Finance Board to impose separate collateral 
requirements for institutions that are members of more than one 
FHLBank. Questions of how to prioritize security interests of two 
FHLBanks over the claims and rights of any party, as provided by 
section 10(e) of the Bank Act, also are raised. (See 12 U.S.C. 
1430(e).) In Part III of this notice, the Finance Board requests 
comment on how permitting multiple FHLBank memberships would affect the 
collateral practices of the FHLBanks from which those members obtain 
advances, and what safeguards the Finance Board could adopt in its 
advances and collateral regulations to ensure that advances to such 
members do not present any undue risks to the FHLBanks or to the 
FHLBank System.
4. Directors and Voting Rights
    If an institution were to be permitted to become a member of more 
than one FHLBank, the Finance Board would have to determine whether 
that institution could participate in the election of directors (i.e., 
by voting or by having its representatives serve on the board) at any 
FHLBank other than the one where it maintains its principal place of 
business. Similarly, the Finance Board would have to determine whether 
the stock owned by such an institution in its ``non-principal'' FHLBank 
could be included in determining the amount of FHLBank stock required 
to be held by the members of those FHLBanks. Each year, the Finance 
Board allocates elective directorships among the states

[[Page 50373]]

based on the amount of FHLBank stock required to be held by the members 
that are located in each state. The FHLBanks also use the required 
stock holdings to calculate the statutory ceiling on the number of 
votes that any one member may cast in an election of directors.
    Under section 7(b) of the Bank Act, each elective directorship of a 
FHLBank must be designated by the Finance Board as representing the 
members of that FHLBank that are located in a particular state, and may 
be filled only by an officer or director of a member that is located in 
that state. (See 12 U.S.C. 1427(b).) For each elective directorship, 
only the members that are located in the particular state may vote, 
with each share of FHLBank stock required to be held by the member 
carrying one vote. The maximum number of votes that any one member may 
cast, however, is capped at the average number of shares of FHLBank 
stock required to be held by members in that state as of the end of the 
calendar year.
    Currently, each member of a FHLBank is designated as being located 
in a particular state, based on the location of its principal place of 
business, which in turn is based on the location of its home office, as 
specified in its charter. (See 12 CFR 925.18(b).) Based on that 
designation, a member may vote for FHLBank directors, and the officers 
and directors of the member are eligible to serve as a FHLBank director 
representing that state. Under current practice, an institution is 
deemed to have only one ``principal place of business,'' although it 
may be in a state other than where the home office is located. (See 12 
CFR 925.18(c) (allowing for an alternative location for the principal 
place of business).) Even if the Finance Board were to permit an 
institution to become a member of one or more additional FHLBanks, it 
is not clear that the member could have any principal place of business 
other than its current state and, therefore, it is unclear whether the 
lack of a principal place of business within the additional FHLBank 
districts would preclude the member from participating in the elections 
of the additional FHLBanks or from having its stock included in 
determining the average amount of FHLBank stock held by the members of 
the additional FHLBanks. The concept of a ``principal place of 
business'' suggests exclusivity, i.e., notwithstanding that an 
institution may conduct its business from a multitude of locations, 
only one of those locations will be its home office, corporate 
headquarters, or the location at which most of its business is 
conducted.
    In Part III of this notice, the Finance Board requests comment 
generally on the extent to which an institution if it were allowed to 
become a member of more than one FHLBank should be permitted to 
participate in the election of directors for its ``non-principal'' 
FHLBanks. The Finance Board also requests comment on whether allowing 
such an institution to participate in the elections of its ``non-
principal'' FHLBanks would have any adverse effects, either as to the 
FHLBanks themselves or as to the other members of the additional 
FHLBanks that maintain their principal place of business within the 
district, particularly the community financial institutions. The 
Finance Board further requests comment on whether it would be advisable 
for a particular institution to be deemed to have more than one 
principal place of business for FHLBank membership purposes and, if so, 
how the additional principal places of business should be determined.
5. Evaluation of ``Demanded by Convenience'' Membership Applications
    All applicants for FHLBank membership must satisfy certain 
statutory eligibility criteria in order to be approved for membership. 
(See 12 U.S.C. 1424.) The Finance Board's membership regulation 
prescribes documentation and other requirements for evaluation of 
membership applications, including evaluation of an applicant's 
financial condition and other information based on the applicant's 
recent regulatory financial and examination reports. (See 12 CFR 925.6 
through 925.17.) The regulation, however, does not specifically address 
how a FHLBank, or the Finance Board, should evaluate an application for 
an additional membership submitted under the provisions of section 4(b) 
of the Bank Act, nor does it specify what information is required to be 
submitted by an applicant seeking membership under that provision.
    Moreover, applying the existing regulation to such applicants is 
apt to result in some inconsistencies, depending solely on whether an 
application is filed before or after the applicant has merged with a 
member of the FHLBank. For example, WMBFA submitted its application to 
the Dallas FHLBank prior to its merger with Bank United, which (if the 
existing regulations were to be applied to this type of application) 
would appear to allow the application to be processed based solely on 
an evaluation of the financial condition and other information of WMBFA 
prior to its merger with Bank United. By contrast, Fleet submitted its 
application to the New York FHLBank after its merger with Summit-NJ, 
which (if the existing regulations were to be applied to this type of 
application) required the New York FHLBank to evaluate the financial 
condition and other information of the combined entity, i.e., Fleet as 
it exists after the merger with the three separate Summit Bank 
subsidiaries. (See 12 CFR 925.15.)
    Such materially different processing requirements illustrate the 
degree to which the current regulation lacks a coherent approach to the 
evaluation of applications for multiple FHLBank memberships under the 
provisions of section 4(b) of the Bank Act. In cases where an 
institution that is a member of one FHLBank seeks membership in another 
FHLBank as a result of its merger with a member of the latter FHLBank, 
the merger itself has been cited as a compelling factor justifying the 
additional FHLBank membership. In such circumstances, logic suggests 
that the eligibility of that out-of-district institution for membership 
in the additional FHLBank should be determined in light of the 
financial and other data of the post-merger entity, rather than the 
data of the institution as it existed prior to the merger. To proceed 
otherwise effectively would require the FHLBank (and the Finance Board) 
to determine the eligibility of an out-of-district institution for 
membership without regard to the in-district presence that the 
institution has acquired through the merger. The Finance Board believes 
that whatever process that might be adopted for the review of such 
membership applications if multiple FHLBank memberships were to be 
permitted should be applied consistently, and should not vary based 
solely on whether the merger occurs before or after the submission of 
the membership application. In Part III of this notice, the Finance 
Board requests comment on whether the procedures and criteria for 
evaluating such applications if multiple FHLBank memberships were to be 
permitted should be applied consistently to all such applicants, and 
whether there are any reasons why the Finance Board should not require 
that the analysis of the membership application be focused on the 
combined entity, i.e., as it exists or will exist subsequent to its 
merger.

III. Solicitation of Comments

    The Finance Board is soliciting comments on the following 
questions, which relate to how developments in the membership base have 
affected the FHLBank System, and how permitting a

[[Page 50374]]

single depository institution to become a member of more than one 
FHLBank might affect the FHLBank System. This part of this notice 
contains all the questions for which the Finance Board specifically 
seeks comment.

A. Issues Regarding the Current Structure of the FHLBank System

    1. What are the implications for the FHLBank System of increasing 
consolidation among the membership base of the FHLBanks? Specifically, 
what are the risks to a FHLBank of having a significant portion of its 
business and capital stock concentrated in a small number of large 
members, and what is the best way to manage those risks? How does such 
concentration of business and stock affect the distribution of FHLBank 
services to the membership and the governance of the FHLBanks?
    2. What are the implications for the FHLBank System of the current 
structure under which two or more depository institutions that are 
subsidiaries of the same holding company may become members of separate 
FHLBanks? Specifically, have such ``affiliated memberships'' caused 
competition among FHLBanks to a degree that was not contemplated when 
Congress created the FHLBank System? If so, is such competition either 
beneficial or harmful to the accomplishment of the public purposes of 
the FHLBank System?
    3. What, if any, restrictions on the terms of membership for 
depository institutions that operate in more than one FHLBank district, 
or for depository institutions whose affiliates are members of other 
FHLBanks, are necessary or appropriate to minimize any risks that may 
be associated with such members or to preserve the cooperative nature 
of the FHLBank System?
    4. What would be the implications of revising the structure of the 
FHLBank System to allow a single depository institution to become a 
member of more than one FHLBank? Would the risks or benefits of such a 
structure differ materially from those presented by the current 
structure, under which affiliated depository institutions may be 
members of different FHLBanks? Would revising the structure in such a 
manner affect the ability of the FHLBanks to achieve their statutory 
mission to support housing finance and community lending or affect 
FHLBank and FHLBank System safety and soundness?
    5. Would allowing a single depository institution to become a 
member of more than one FHLBank affect the distribution of membership 
benefits to small members relative to the larger members? How would it 
affect the distribution of membership benefits to large institutions 
that are members of only one FHLBank, relative to large institutions 
that are members of more than one FHLBank?
    6. Certain depository institution members currently conduct a 
significant portion of their business beyond the geographic boundaries 
of their FHLBank district. What effect do these inter-district 
activities have on the safety, soundness, stability, and mission 
achievement of the FHLBank System?
    7. What actions, if any, should the Finance Board take in response 
to the increasing amount of inter-district activities conducted by some 
members of the FHLBank System?
    8. What are the implications, for distribution of Affordable 
Housing Program (AHP) funds, of continued consolidation within the 
membership base of the FHLBank System and the expansion of out-of-
district financing activities? More specifically, how does inter-
district consolidation and expansion of out-of-district financing 
activities affect the geographic distribution of AHP funds? Given that 
certain FHLBanks have limits on the amount a single institution may 
receive in AHP funds, how do these changes affect the distribution of 
AHP funds?
    9. Should the Finance Board consider invoking its statutory 
authority to consolidate two or more FHLBanks and/or to readjust 
district boundaries, or take some other action, as a means to address 
any strains placed on the FHLBank System by the ongoing consolidation 
within the banking industry?

B. Multiple FHLBank Membership Issues

    1. If the Finance Board were to determine that a single depository 
institution may become a member of more than one FHLBank under section 
4(b) of the Bank Act, what factors should the Finance Board consider in 
determining whether a particular institution would meet the ``demanded 
by convenience'' standard required by section 4(b)?
    2. What conditions, restrictions, or limitations should the Finance 
Board impose on a single depository institution if it were permitted to 
become a member of more than one FHLBank to ensure that the institution 
does not pose any undue risks to those FHLBanks, their respective 
members, or to the cooperative nature of the FHLBank System? What 
conditions, restrictions, or limitations should the Finance Board 
impose to allow the FHLBank System to better achieve its housing 
finance mission if a single depository institution were to be permitted 
to become a member of more than one FHLBank?
    3. Because the number of ``adjoining districts'' varies from 
FHLBank to FHLBank, how could the Finance Board best ensure that 
members in different FHLBanks, if permitted to become members of more 
than one FHLBank, would have equal opportunities under section 4(b) to 
become a member of a FHLBank in an adjoining district? Would a 
limitation on the number of FHLBanks that any one institution could 
join be an appropriate means to avoid disparate treatment of members?
    4. How should the stock purchase requirements of each FHLBank be 
applied to an institution if it were permitted to become a member of 
more than one FHLBank? Should the Finance Board require such members to 
comply with the stock purchase requirements of each FHLBank in the same 
manner as those requirements apply to all other members, particularly 
in light of section 7(j) of the Bank Act, which requires each FHLBank 
to administer its affairs impartially and without discrimination 
against any member?
    5. Given that the FHLBanks are now developing plans to implement a 
new capital structure, and given that members, if allowed concurrent 
memberships in two or more FHLBanks, might be subjected to different 
stock purchase requirements at each FHLBank, should the Finance Board 
use its authority to approve those plans to require that all FHLBanks 
impose equal, or very similar, stock purchase requirements for 
membership, advances, and other activities such as mortgage purchases?
    6. How would single depository institutions if permitted to become 
members of more than one FHLBank affect the collateral practices of the 
FHLBanks from which those members obtain advances, and what safeguards 
should the Finance Board adopt to ensure that advances to such members 
do not present any undue risks to the FHLBanks or to the FHLBank 
System?
    7. To what extent, if any, should an institution if it were allowed 
to become a member of more than one FHLBank be permitted to participate 
in the election of directors for its ``non-principal'' FHLBanks and, if 
such participation were allowed, would it have any adverse effects on 
the non-principal FHLBanks or on their members, particularly the 
smaller members, such as community financial institutions?
    8. What financial and other information about the prospective 
member should the Finance Board

[[Page 50375]]

require to be submitted by an institution if it were permitted to apply 
for an additional FHLBank membership under the Bank Act? Specifically, 
in any case involving a merger of two institutions, should the 
eligibility of the surviving institution for the additional FHLBank 
membership be determined based on an analysis of the combined entity, 
i.e., as it exists subsequent to the merger?

IV. Request for Comment

    The Finance Board is interested in receiving comment on all aspects 
of the issues raised by the continued growth in inter-district 
activities of FHLBank members and the concept of multiple FHLBank 
memberships, in addition to the specific requests for comment made in 
this solicitation of comments.

    Dated: September 26, 2001.

    By the Board of Directors of the Federal Housing Finance Board.
J. Timothy O'Neill,
Chairman.
[FR Doc. 01-24588 Filed 10-2-01; 8:45 am]
BILLING CODE 6725-01-P