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Home Newsbytes

ABA cautions against opening FHLB System to nonbank entities

October 31, 2022
Reading Time: 2 mins read
FHFA issues mission report for 2021

Allowing newer, nonbank entities access to the Federal Home Loan Bank system would introduce significant risk, given that they do not have comparable capital requirements, regulation or oversight to existing FHLB members, the American Bankers Association said in recent comments to the Federal Housing Finance Agency.

FHFA is conducting a review of the FHLB system, and ABA’s comment letter is an extension of comments made by the association during a recent listening session hosted by the agency. In its letter, ABA welcomed the review but noted that only Congress can make significant changes to FHLB’s ownership structure and membership criteria. The association also reiterated the FHLB system is operating as intended and should not be repurposed or otherwise altered absent a good rationale.

FHFA is seeking feedback on six topics, including FHLBs’ purpose in a changing marketplace, their role in promoting affordable housing, and membership eligibility and requirements. ABA said that other commenters have suggested continuing to make FHLB advances available for community banks but restrict larger banks to the Federal Reserve or other liquidity sources. “Such a restriction would gravely undermine the FHLBs’ mission to provide reliable liquidity to their member institutions to support housing finance and community investment,” ABA said. There have also been suggestions of opening the system to newer financial service providers, but given they are governed by different regulations, that would be a mistake, the association said.

“If there is a demonstrated need to provide these entities with a liquidity source, Congress should enact legislation that addresses that need with a separate new system, ideally with the same level of safeguards that have kept the FHLB system financially viable and fiscally stable for 90 years,” ABA said. “Congress should not, however, attempt to revise or reform the existing system to accommodate these other entities, as doing so would almost certainly destabilize the existing system and potentially destabilizing the stability of the broader financial system.”

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