Federal Home Loan Bank System: Reforms Needed to Promote Its Safety, Soundness, and Effectiveness

Highlights

Pursuant to a congressional request, GAO reviewed various aspects of the Federal Home Loan Bank (FHLBank) System, focusing on: (1) whether the FHLBank System can pay its assessments for affordable housing and help finance the savings and loan cleanup while carrying out its mission; (2) appropriate capital standards for the FHLBank System; (3) whether the terms of FHLBank membership should be changed; (4) the current and future role of the FHLBank System in affordable housing and how System consolidation will affect it; (5) whether the FHLBank System should be permitted to offer new products and services; and (6) whether changes in the corporate governance and regulation of the FHLBank System are needed.

Recommendations

Matter for Congressional Consideration

Matter	Status	Comments
Congress should modify the shortfall allocation portion of the FHLBanks' Resolution Funding Corporation (REFCorp) obligation to: (1) improve the relationship between the System's REFCorp and Affordable Housing Program (AHP) obligations and the System's earnings; (2) reduce the risks being undertaken because of the fixed obligations; (3) eliminate the penalty that may be imposed on advances made to Savings Association Insurance Fund (SAIF)-insured members; (4) reduce the possible instability from state-chartered, SAIF-insured savings associations becoming voluntary members; and (5) enhance the ability to make other System changes.	Closed – Implemented	The Gramm-Leach-Bliley Act of 1999 (P.L. 106-102) modified the shortfall allocation in a manner that addressed the concerns noted in the recommendation.
Congress should drop the floor dollar amount required for AHP, making each FHLBank's contribution to AHP fixed percentage of its income.	Closed – Not Implemented	Congress has not addressed this issue.
To make System capital requirements commensurate with the risks undertaken by FHLBanks, Congress should replace the current capital stock requirements and the FHLBanks' debt-to-equity limit with a risk-based capital requirement analogous to that used for banks and thrifts.	Closed – Implemented	The Gramm-Leach-Bliley Act of 1999 (P.L. 106-102) requires the FHFB to establish risk-based capital standards for the FHLBank System banks that are analogous to those for commercial banks.
Recognizing that FHLBank stock is redeemable and, therefore, is not permanent capital, Congress should ensure that the new capital requirements provide for minimum retained earnings in each FHLBank. These retained earnings should, at a minimum, protect against the measurable risk undertaken by each FHLBank and the associated management and operations risks.	Closed – Implemented	The Gramm-Leach-Bliley Act of 1999 (P.L. 106-102) required the FHFB to establish risk-based capital standards for the FHLBank System banks. It includes a provision that appropriately addresses the recommendation on retained earnings.
To improve the long-term efficiency and value of the FHLBank System, Congress should make FHLBank membership voluntary for all eligible institutions and make membership terms the same for all eligible members.	Closed – Implemented	The Gramm-Leach-Bliley Act of 1999 (P.L. 106-102) implemented this recommendation by mandating that all FHLB System membership be voluntary.
To ensure an efficient and effective arm's length regulator for the System, Congress should merge the safety and soundness functions of the Federal Housing Finance Board (FHFB) with those of the Office of Federal Housing Enterprise Oversight (OFHEO). The merged entity could be an independent office within the Department of Housing and Urban Development (HUD), as OFHEO is now, or could be a stand-alone independent agency, as FHFB is now. The combined federal regulator would gave full safety and soundness responsibilities for all three housing-related government-sponsored enterprises.	Closed – Not Implemented	There is still interest among some House Financial Services Committee members to establish a single regulator for the housing GSEs. This issue, among others, is again included in a House bill on which hearings were held. It does not, however, seem advisable to keep this 1994 recommendation open any longer.
Congress should not give corporate governance responsibilities currently assigned to FHFB to the combined regulator but leave them to the FHLBanks and their shareholders.	Closed – Implemented	The Gramm-Leach-Bliley Act of 1999 (P.L. 106-102) reassigned certain corporate governance responsibilities previously assigned to the FHFB (regulator) to the FHLBank System. This accomplishes the objective of the recommendation: to remove the regulator for involvement in System business.

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Topics

Housing

Banking regulationFederal aid for housingFederal corporationsFinancial institutionsFinancial management systemsGovernment sponsored enterprisesInsured commercial banksMortgage loansMortgage programsRegulatory agencies