Home Loan Banks and other housing GSE's play in communities across the Nation is, in my opinion, invaluable.

We are currently experiencing what I hope, and still believe, is just a hiccup in our housing GSE system, but given the importance of the housing finance system and the billions of dollars that move daily through the GSE's from investors all around the world and then into our communities, even this little hiccup requires Congress to act to ensure that safety and soundness and the confidence of the markets in the GSE system is maintained and, we would hope, be even strengthened.

This is a good time for Congress to take a look at the entire system, and while this Subcommittee does not have jurisdiction over all of the GSE's, we do have the responsibility for the Federal Home Loan Banks, and that is why we are concentrating there today.

Since Gramm-Leach-Bliley, several issues have emerged in the Home Loan Bank System that Congress has not reviewed, and these issues relate directly to safety and soundness and the mission of the System. So we will begin to create a record on these issues here this afternoon.

The issues are: one, whether or not the Home Loan Banks should register with the SEC; two, whether or not a member institution of the System should be permitted to be a member of more than one regional Home Loan Bank; three, at what level should the Home Loan Banks be permitted to participate in the secondary mortgage market; and, four, whether or not we should have a single regulator for all of the housing GSE's. And all of these issues are closely related to the safety and soundness and the mission of the System.

I understand, to put it somewhat mildly, that these issue remain unagreed upon, both inside and outside the System, and I believe that all would agree that each of them could have a major impact on housing finance, homeownership costs, and, therefore, the economy, particularly the economy at this point where housing has led the recovery. That usually is not the case. Housing is usually the last thing to recover. But in this very unusual recession and recover, housing has been one of the strongest parts. That is another reason why we need to pay attention.

In bringing up the final question of whether Congress should create a single regulator for all of the GSE's, I want to make sure that I acknowledge the efforts of Chairman Korsmo. Mr. Chairman, you have put forth tremendous effort to strengthen the regulation of each institution individually as well as the System as a whole through a more thorough examination regime, and I congratulate you for that.

Mr. KORSMO. Thank you, sir.

Senator BENNETT. Regardless of the quality of regulation, there are those who believe that all the housing GSE's should operate under a coordinated regulator with appropriate authority, believing that separate can never be equal, at least in perception of the markets. I will continue to reserve judgment on that, but we are going to hear from Treasury Secretary Snow tomorrow before the House. I expect he will address that issue, and we will look at his testimony with great interest.

bernathy, we welcome you back to the Committee, ved so ably for such a long period of time. I suspect he same way and reserve judgment until after your en. But if you want to surprise us

be happy to have you surprise us.

nson, I appreciate very much your attendance, not aring but your diligence in this issue in the past, and elighted to hear from you.

TATEMENT OF SENATOR TIM JOHNSON

INSON. Thank you, Chairman Bennett, and welcome
Abernathy and Mr. Korsmo. I thank you, Mr. Chair-
ing this afternoon's hearing on oversight of the Fed-
Dan Bank System. I cannot think of a more timely
1 recent attention on Government Sponsored Enter-
bate over the nature and scope of their regulatory

good opportunity to take stock of the role, mission,
n of the Home Loan Banking System. I apologize in
y schedule will not allow me to stay for the entire
isual, I have competing and overlapping obligations,
at we are in good hands under your leadership.
l Home Loan Banks play a critical role in our Na-
g finance and community lending system. Since the
Banks were created in 1932 with the mission of help-
homeownership more affordable, the positive impact
on of the Bank has grown significantly.

e of South Dakota, the Home Loan Banking System
critical funding for community lending needs. Until a
to safety of financial assets, our small community
serious funding issues, related in part to the continued
e value of deposit insurance. The Home Loan Banks
anced services to counteract those funding shortfall,
t South Dakota consumers had access to loans that
to keep our rural areas economically viable.

Iso note that since 1990, South Dakota has received from the Federal Home Loan Bank of Des Moines' afsing program. This investment has assisted 66 affordprojects throughout our State.

man, today's hearing is also well-timed because it is ase to a crisis. The Committee has important responsiluct regular oversight, and this is especially important to the Federal Home Loan Banking System because al role that it plays in today's financial marketplace. lispute that the Banks play a different role than they the 1930's. Some do, however, dispute whether these es fall within the proper mission of the Banks. That is question. I am pleased we will have a chance to hear ty of witnesses today.

n, we should also consider whether the Federal HousBoard has the tools it needs to regulate what have besingly complex and sophisticated financial institutions. e witness has advocated that the Home Loan Banks

share a regulator with the other housing GSE's. This hearing could not be better timed to hear both sides of that debate as we move toward consideration of possible changes in the regulation of Fannie Mae and Freddie Mac.

Finally, some of us here have had the chance to hear from SEC Chairman Donaldson this morning about the implementation of Sarbanes-Oxley. I hope that the witnesses will describe for the Subcommittee their experience with any corporate governance reforms and their position on disclosure proposals currently under discussion.

Chairman Bennett, thank you for holding today's hearing, and I look forward to hearing from these excellent witnesses. Senator BENNETT. Thank you very much. Secretary Abernathy, we will start with you.

STATEMENT OF WAYNE A. ABERNATHY

ASSISTANT SECRETARY FOR FINANCIAL INSTITUTIONS
U.S. DEPARTMENT OF THE TREASURY

Mr. ABERNATHY. Thank you, Mr. Chairman, Senator Johnson, Members of the Subcommittee. Thank you for this opportunity to testify this afternoon on the Federal Home Loan Bank System. I would like to focus on three topics this afternoon: First, the need for the Federal Home Loans Banks to register with the Securities and Exchange Commission under the terms of the Securities Exchange Act of 1934; second, I would like to talk about multidistrict membership; and, third, Treasury's current review of the Federal Home Loan Bank System.

The observance of good, fundamental practices of corporate governance is a high priority for this Administration. For more than a year, the Administration has been urging that all GSE's comply with the same corporate disclosure requirements of the Securities Exchange Act of 1934. We are pleased that Fannie Mae has complied with this request. Freddie Mac has also agreed, though we are disappointed to learn that Freddie Mac may not be registering until sometime in 2004. The sooner they register, the better.

The Administration has continued to urge that the Federal Home Loan Banks also move forward with voluntary registration. Some have argued that the unique characteristics of the Banks lessen the need for registration under the 1934 Act. All of these facts are important and must be, and I believe can be, taken into account.

However, the differences do not change the fundamental fact that the Home Loan Banks are significant participants in our capital markets. Investors should have the same information regarding the condition of the Home Loan Banks as they have for other significant participants in the capital markets.

At the end of June, the Federal Home Loan Banks had outstanding consolidated obligations of $713 billion. The individual Banks are each large financial institutions. As of year-end 2002, the largest Bank, the Bank of San Francisco, had $135 billion in total assets. The smallest, the Bank of Topeka, had $33 billion in total assets, while the average was $58 billion in total assets. Even the smallest would rank among the top 40 commercial banks in the United States.

m

would benefit from the added oversight of the SEC, s of reviewing financial disclosures and through uniment of current standards. And investors would have aking comparable evaluations of the variety of institue competing for their investment dollars. Our system regulation should offer investors nothing short of that

ued operation of the Banks outside of the SEC-adminrate disclosure regime is inconsistent with our objecind and resilient financial system. We understand that ave some remaining concerns with how certain aspects ness operation would be treated. I would remind all at the Federal Home Loan Banks are not the only corutions in America that have unique characteristics. exibilities that the SEC has to address individual cirwe are confident that the Banks' concerns can be

ciate the discussions that several of the Banks have
e SEC earlier this year, and we look forward to these
being renewed in the immediate future, within a con-
tance of the public interest that would be served by the
e Loan Banks registering under the 1934 Act.
stand that the Board of Directors of the Bank of Cin-
tly announced that the Bank will be taking the next
rocess. In a recent letter to Secretary Snow, HUD Sec-
nez, and Chairman Korsmo, the Board of Directors of
Home Loan Bank of San Francisco expressed their goal
e Federal Home Loan Banks to become role models for
nsparency." That is our goal as well, to which registra-
he Securities Exchange Act of 1934 is essential.
ist talk about multidistrict membership, in context.
continues to be debate over a number of Home Loan
cies, one current issue, the question of multidistrict
I raises particular concern. The appropriate forum for
n of this issue must be kept in mind. As the Treasury
has written in a comment letter to the Finance Board,
I whether allowing multidistrict membership is wise, a
g of the statute finds little room to conclude that the
rd has the legal authority to approve it. It provides,
From the statute,

n eligible to become a member under this section may become a
, or secure advances from, the Federal Home Loan Bank of the dis-
s located the institution's principal place of business, or of the Bank
oining such district, if demanded by convenience and then only with
the Board.

ayed with that language many times trying to make es that "or" work, and I have thought of it in terms en at home. I can say to my son, "You may have your n your room or you may have it in the playroom." To at is one room. If I wanted to say it could be either two and both of them, I would say, "You can have your room and the playroom." But if I use an "or," it brings d there is only one place where those are going to be

located. The statute provides for an "or," and it seems pretty clear

to us.

Now, to say this is not to render a policy point of view. There are compelling arguments on both sides of the question. Clearly, our financial system has changed dramatically since 1932. In the intervening years, however, Congress has revised the governing statutes on several occasions. But they have never changed that particular requirement. It is to the Congress that these arguments should be offered and where any change in the statute will have to be made.

The third point I would like to raise. Earlier this year, I requested the Office of Financial Institutions Policy at Treasury to conduct an in-house review of the Federal Home Loan Bank System, with particular but not exclusive, consideration of the effect of the changes enacted as part of the Gramm-Leach-Bliley Act of 1999. As I announced at that time, the review would consider the following points: how these changes have affected the ability of the Federal Home Loan Banks to meet their statutory mission; implications for the financial strength of the Banks individually and the System in general; how the business operations of the Banks contribute to accomplishing their statutory mission; issues regarding governance structure and management, including executive compensation; effect of new capital structures on operations; and other issues regarding the strength of the System and the structure of Federal oversight.

We are now about 4 months into that process, nearing completion of our first phase. Again, I would like to emphasize that Treasury's review of the Federal Home Loan Bank System is part of what we normally do at Treasury, and what I envision for our current review is a more specific look at how the changes made to the Federal Home Loan Bank System as part of the GLBA have been implemented. Treasury is not primarily a regulatory agency. We see as part of our important function, however, providing executive branch oversight of the activities of the independent financial regulators, and this study is part of meeting that obligation and responsibility.

The Federal Home Loan Bank System presents policymakers with issues that deserve continued attention. We must continue to evaluate the System to ensure that it is achieving the objectives set forth by Congress, meeting the needs of our communities that might not be otherwise met.

Thank you again for providing me this opportunity to present our views before you today and to discuss these important issues, and I would be glad to answer any questions.

Senator BENNETT. Thank you very much for your testimony. Chairman Korsmo, we appreciate your being here and look forward to hearing from you.

STATEMENT OF JOHN T. KORSMO

CHAIRMAN, FEDERAL HOUSING FINANCE BOARD

Mr. KORSMO. Thank you, Chairman Bennett, Ranking Member Johnson, and distinguished Members of the Subcommittee, I appreciate the opportunity to speak with you today about the Federal Housing Finance Board and the Federal Home Loan Bank System.