A layperson’s guide to the Federal Home Loan Banks review

Tomorrow, the Federal Housing Finance Agency will release its much-anticipated report on the Federal Home Loan Banks (FHLBanks). The review of the FHLBanks was commenced over a year ago due to the agency’s concern about the mission, operations and efficiency of the 11 FHLBanks. 

Nineteen field hearings, two rounds of written comments and dozens of listening sessions later, there is every reason to expect that the report will herald a new day for the 91-year-old banks. 

Under this intense public scrutiny, one might have expected the FHLBanks to have been on their best behavior this year. But that is not in their nature. 

During the past year, the FHLBanks have contributed to a national banking crisis; the First Republic Bank, Silicon Valley Bank and Signature Bank failures — respectively, the second, third and fourth largest U.S. bank failures on record. They have also used this year to veer far off their housing missions into the murky world of crypto banks. While their assets have ballooned, their contributions to solving the country’s housing crisis have shrunk. And, they have topped this off by rewarding their executives with multi-million dollar compensation packages at each of the 11 government-sponsored banks.  

The word hubris is not to be found in the federal charters of any of these banks but it certainly is in the DNA of its operators. Nothing but hubris can explain why the 11 banks have claimed, until the eve of FHFA’s report, that they receive no taxpayer assistance. After all, we taxpayers guaranty 100 percent of the FHLBanks’ $1.5 trillion debt. They protest that the massive debt is only implicitly guaranteed by the taxpayers. Have they not heard of Fannie Mae and Freddie Mac? And where would they be without the taxpayers’ guaranty? 

The content of the agency’s report is a well-guarded secret. What, however, is certain is that the FHLBanks and their dozens of lobbyists and spin agents are poised to pounce on the merest suggestion of reform. They have already signaled so by warning of “unintended consequences,” “do no harm,” “don’t mess with success” etc.   

To help see through the smokescreen that will be laid down by the FHLBanks and their acolytes, here are some principles that will be useful in evaluating the agency’s report. 

The first principle: Balance the private benefits enjoyed by members of FHLBs (low-cost funding and dividends) and their public benefits. For every $25 of taxpayer subsidy of the FHLBanks, the public gets $1 back, primarily in affordable housing support. This is as unjust as it is unsustainable and needs to be corrected. 

The second principle: Public benefits produced by the FHLBanks must include new and existing approaches to the funding of sustainable affordable housing, community development and small businesses lending. Innovative funding mechanisms are all around us. Create incentives among the FHLBanks to use them. Now, there are no such incentives. 

The third principle: Disclose publicly the terms and uses of FHLBanks’ advances and each FHLBank’s affordable housing and economic development activities. No more discreet lending to the likes of Silicon Valley Bank, et al. Transparency is a good thing especially when you’re dealing with the taxpayers’ money. 

The fourth principle: Executive compensation should reflect the public/private nature of the enterprise. Why do the presidents of the FHLBanks have multi-million-dollar pay packages while the Federal Reserve Bank presidents, whose responsibilities well exceed those of the FHLBank presidents, earn far less? And why do FHLBank executives suffer no consequences when their poor performance yields disastrous consequences? 

These ideas appear to be common sense. Keep in mind, however, that to the FHLBanks they are heretical. The FHLBanks violate each of these every day they are open for business. 

In the months and years ahead, before the agency and before the Congress, these principles will be tested. They will mark the difference between those seeking to reform this sclerotic system and those who defend it. 

Until very recently, the FHLBanks and their allies have had the advantage in terms of money, political clout and organization. Reformers were largely disorganized with only their independent voices speaking out. 

Enter now, the Coalition for Federal Home Loan Bank Reform, where I serve on the advisory board. The coalition consists of a variety of regulators, FHLB alumni, bankers, academics, housing advocates and everyday citizens. We are united around the belief that coordinated action is the only way to improve a system of banks that has gone far off course and we encourage you to add your voice. 

Cornelius Hurley was an independent director of the Federal Home Loan Bank of Boston for fourteen years. He serves on the advisory board of the Coalition for Federal Home Loan Bank Reform and teaches financial services law at Boston University School of Law.