Federal Home Loan Bank System: Establishment of a New Capital Structure

The Federal Home Loan Bank (FHLBank) System is establishing a new capital structure that, if properly implemented, is likely to be an improvement over the historic structure. Capital will become more permanent, and new risk-based and leverage capital requirements will also be implemented. The new capital structure has the potential to address the risks associated with advances as well as the direct acquisition of mortgages. However, it is too early to assess the overall adequacy of the structure. So far, direct acquisition appears to provide regional diversification of mortgage acquisitions and incentives to member institutions for sound mortgage underwriting and servicing through the sharing of credit risks. However, risks could be affected if changes are made in the level of mortgage acquisition activity and in the risk-sharing agreements between the FHLBanks and their member institutions. Such changes might also increase the importance of risk-based capital requirements compared to the leverage requirements of the Federal Housing Finance Board (FHFB). Risks in the FHLBank System will increase because of expanded collateral provisions in the Gramm-Leach-Bliley Act and direct mortgage acquisition activity. Mitigation of that risk will depend on risk management by the FHLBanks, the adequacy of capital structure, and oversight by FHFB. In addition to the FHLBanks, the acquisition activity could also generate additional risks for the enterprises. Although the FHLBank System and the enterprises primarily engage in different business activities, these differences may decrease if direct mortgage acquisition activity grows dramatically. Having one housing government sponsored enterprise (GSE) regulator for safety and soundness and mission compliance would provide greater independence and objectivity, greater prominence, improved ability to assess the competitive impact of new initiatives on all housing GSEs, and improved ability to ensure consistency of regulation of GSEs that operate in similar markets.