Federal Housing Finance Agency Proposes Overhaul of Federal Home Loan Banks to Refocus on Housing Finance Mission

The new reforms spurred by the spring banking crisis seek to refocus the Federal Home Loan Banks system on their original purpose, housing finance, potentially requiring most banks to hold at least 10% of their assets in residential mortgages and decreasing the number of the Federal Home Loan Banks in the system.

• The Federal Housing Finance Agency (FHFA) is proposing to overhaul the Federal Home Loan Bank system by redirecting its focus onto its original purpose, particularly supporting housing finance. This move followed the banking crisis earlier in the year which saw the system lending to distressed banks.
• A key element of the proposed reforms is a potential requirement for banks to hold at least 10% of their assets in residential mortgages. The intention here is to ensure most banks are engaged directly in housing finance to be eligible for resources from the Federal Home Loan Bank system.
• The role of the Federal Home Loan Banks as a 'lender of last resort' is set to be reviewed, with the FHFA suggesting this role is more appropriately filled by the Federal Reserve's discount window instead. This comes after the FHLB system's role in lending to failing banks in the spring was seen as contentious.
• The proposed reforms also include more stringent oversight of how banks use the Federal Home Loan Bank system and increased efforts to steer banks toward the Federal Reserve's discount window for their liquidity needs.
• Additionally, the FHFA may reduce the number of institutions in the Federal Home Loan Bank system. The report suggested that the current figure of 11 home loan banks could potentially be reduced to as few as eight without needing additional authority from Congress.

3 Articles

Investopedia American Banker Reuters