FHLBank Legislative Update
GSE Legislation, Deposit Insurance Reform and Retained Earnings Proposal

Sides Drawn on GSE Regulatory Reform Bill

As Congress heads into its final lap before breaking for the mid-term elections, time is running out on passage of GSE regulatory reform legislation. While some key players have made statements indicating a willingness to compromise on some of the major issues, the journey for passage is decidedly uphill.

James Lockhart, director of the Office of Federal Housing Enterprise Oversight (OFHEO), and various Treasury officials have indicated a willingness to consider modifying the Senate portfolio language and give the new regulator more discretion. U.S. Sen. John Sununu’s (R-NH) announcement that he would accept some sort of affordable housing program – a change from his earlier staunch opposition – was a sign of encouragement to affordable housing advocates that hundreds of millions of additional dollars for housing could be on the way.

On the other side of encouraging agreement for a bill, several Treasury officials have stated that the Treasury Department would exercise its unused authority to limit the issuance of the debt of Fannie Mae and Freddie Mac if legislation is not enacted. As is so often the case, these challenges to Fannie Mae and Freddie Mac have included FHLBanks. After initially referring only to Fannie and Freddie, Treasury officials indicated that their review of restricting GSE debt would include FHLBanks as well.

September will be a busy time for Congress, and time to work on the GSE legislation will be in short supply. It is highly likely that this unfinished business will be back in the next Congress.

FDIC Proposes Deposit Insurance Reform

The Federal Deposit Insurance Corporation (FDIC) has issued a notice of proposed rulemaking (NPR) to implement deposit insurance reform legislation and establish a new risk-based deposit insurance premium system. The NPR does not directly impact the use of FHLBank advances (loans) by member institutions. However, the proposal does raise the question and gives some insight to why action affecting advances was not included in the NPR.

Among the input sought by the proposal is the advisability of “including Federal Home Loan Bank advances in the definition of volatile liabilities or, alternatively, charging higher assessment rates to institutions that have significant amounts of secured liabilities.” The NPR notes: “Volatile liabilities do not include other borrowed money, which primarily consists of Federal Home Loan Bank advances, in order to avoid penalizing those institutions (particularly savings institutions) that have traditionally relied on advances.” The proposal defines volatile liabilities as foreign office deposits, federal funds purchased and securities sold under agreements to repurchase, and time deposits $100,000 or more held in domestic offices divided by gross assets.

The comment period on the proposal closes September 22. The law requires that the final rule must be approved by November 5.

Finance Board Reviewing Comments on Retained Earnings Proposal

The Federal Housing Finance Board continues to assess the more than 1,000 comment letters, most of which call for a withdrawal of the regulation. The Finance Board has given every indication that it will reject calls for withdrawal, consider input, amend the proposal and issue a final rule.