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nancial institutions, particularly as the Federal Home Loan Bank
ch important community needs as promoting homeownership.
ance market in the United States is the broadest, deepest, and
ousing finance market in the world. That market is supported by
al services infrastructure, which includes depository institutions,
mortgage bankers, mortgage insurers, and a variety of other cap-
mediaries. Prominent among capital market intermediaries that
frastructure are the housing government sponsored enterprises
Mae, Freddie Mac, and the FHLBank System.

System has had a long history of supporting housing finance in
3 created the FHLBank System in 1932 in response to a Depres-
crisis in housing finance. The FHLBank Act directs the FHLBanks
lled advances-to eligible members. Advances traditionally served
ng thrifts access to reliable long-term funding for mortgage lend-
ce of liquidity to help thrifts finance deposit outflows without call-
eir mortgages. Over time, Congress has expanded the System's
beyond thrifts, but the primary function of advances has remained
t. Today, financial markets and our Nation's housing finance sys-
emblance to the one that existed when the FHLBank System was

t that I would like to focus on three topics this morning: The need to voluntarily register with the Securities and Exchange Commisthe terms of the Securities Exchange Act of 1934; the FHLBank ties of the FHLBank System; and Treasury's current detailed reank System.

tration with the SEC under the 1934 Act

of good, fundamental practices of corporate governance is a high dministration. Foremost among such practices is regular, comisclosure of corporate financial conditions. A key part of that coming the quality of corporate disclosure requirements by the GSE's, more than a year the Administration has been urging all GSE's he same corporate disclosure requirements of the Securities Ex1, as interpreted and applied by the SEC. Investors in GSE securiaccess to the same corporate disclosures as they have for other blicly offer their securities for investment.

that Fannie Mae has complied with this request to voluntarily e its first disclosures under the 1934 Act in the first quarter of c has also agreed to register with the SEC, though we are disthat Freddie Mac may not be registering until sometime in 2004. hey register with the SEC the better for them and their investors, oncur with their intention that such registration and the financial his step entails fully meet the high standards that are required. tion has continued to urge the FHLBanks to move forward with tion with the SEC under the 1934 Act. Some have argued that the HLBank System and the unique characteristics of the FHLBanks Fannie Mae and Freddie Mac lessen the need for registration ct. Certainly there are differences: When the FHLBank System 932, it was created with geographically limited regional banks. ne Loan Bank is cooperatively owned by its members, and its capublicly traded. The 12 FHLBanks raise funds in the capital marnsolidated obligations for which they are jointly and severally liaacts are important and must be and I believe can be-taken into ifferences between the FHLBanks and the other GSE's do not mental fact that the FHLBanks are significant participants in our any measure, and that investors should have the same informacondition of the Home Loan Banks as they have for other signifiet participants. The facts make this case dramatically:

June, the FHLBanks had outstanding consolidated obligations n, of which bonds with original maturity of 1 year or longer 56 billion of the total.

1 FHLBanks are each large financial institutions. As of yearlargest Home Loan Bank (the FHLBank of San Francisco) on in total assets, the smallest (the FHLBank of Topeka) had total assets, while the average among the 12 banks was $58 1 assets. Even the smallest Federal Home Loan Bank would he top 40 commercial banks in the United States.

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Federal Home Loan Bank registration under the Securities Exchange Act of 1934 is an important step in increasing the transparency of the FHLBanks' financial information to investors. The recent problems of Freddie Mac and a credit rating agency's revision of its outlook for one of the Federal Home Loan Banks from stable to negative illustrate the need for investors to have a more accurate picture of the GSE's' financial operations. Following Federal Home Loan Bank registration under the 1934 Act, investors would have access to the FHLBanks' financial information through the same forms and methods as those that apply to other companies that sell publicly traded securities. Investors would benefit from the added oversight of the SEC, both in terms of reviewing the Federal Home Loan Banks' financial disclosures and through the uniform enforcement of current standards. And investors would have the basis for making comparable evaluations of the financial conditions of the variety of institutions competing for their investment dollars. Our system of securities regulation should offer investors nothing short of that standard.

The continued operation of the FHLBanks outside of the SEC-administered corporate disclosure regime is inconsistent with our objective of a sound and resilient financial system. We understand that the FHLBanks have some remaining concerns with how certain aspects of their business operation would be treated if they registered under the 1934 Act. I would remind them and all concerned that the Federal Home Loan Banks are not the only corporate institutions in America that have unique characteristics. It was specifically in order to deal with the variety of corporations in the Nation-while still preserving a high standard of comparable disclosures-that the SEC was given its exemptive authority under the securities statutes. Given the flexibilities that the SEC has to address the individual circumstances of the various registrants under the 1934 Act, we are confident that the Federal Home Loan Banks' concerns can be worked out with the SEC.

We appreciate the discussions that several of the Banks have had with the SEC earlier in the year, and we look forward to those discussions being renewed in the immediate future, within a context of acceptance of the public interest that would be served by the Federal Home Loan Banks registering under the terms of the Securities Exchange Act of 1934. We understand that the Board of Directors of the Federal Home Loan Bank of Cincinnati recently announced the Bank will be taking the next step in the process of voluntary registration with the SEC. In a recent letter to Secretary Snow, Housing and Urban Development Secretary Martinez, and Federal Housing Finance Board Chairman Korsmo, the Board of Directors of the Federal Home Loan Bank of San Francisco expressed their goal "to enable the Federal Home Loan Banks to become role models for corporate transparency." That is our goal as well, to which Federal Home Loan Bank registration under the Securities Exchange Act of 1934 is essential.

Multidistrict Membership, In Context

In chartering each of the housing GSE's, Congress described the markets to be served by these GSE's, the financial activities these GSE's should undertake, and created a regulatory structure to oversee the GSE's and their activities. While there have been and continue to be debates over a number of Home Loan Bank activities and how these activities fit within the statutory confines of the Federal Home Loan Bank Act, one current issue the question of multidistrict membership-raises particular concern. The Federal Housing Finance Board (Finance Board) has received a number of petitions requesting that Federal Home Loan Bank members be permitted to join more than one Federal Home Loan Bank. The Finance Board has analyzed this issue, obtained outside legal counsel on its authority to authorize multidistrict membership, and solicited views from interested parties.

All of that is well and good and appropriate. A lively discussion of policies and programs is healthy. But the appropriate forum for the resolution of these issues must be kept in mind. As the Treasury Department has written in a comment letter to the Finance Board, regardless of whether allowing multidistrict membership is wise, a plain reading of the statute finds little room to conclude that the Finance Board has the legal authority to approve it. It provides:

An institution eligible to become a member under this Section may become a member only of, or secure advances from, the Federal Home Loan Bank of the district in which is located the institution's principal place of business, or of the bank of a district adjoining such district, if demanded by convenience and then only with the approval of the Board.1

112 U.S.C. § 1424(b).

nforced by the comments of Assistant Legislative Counsel Mr.
incipal drafter of the Federal Home Loan Bank Act) in response
ling the Federal Home Loan Act at a Senate hearing in 1932.
e desire, say, for members in South Carolina to borrow of a
ik, because it would mean too great a concentration at the
k. If the New York bank happened to do better than a South
, all members would go there. There is the opportunity in the
ber whose principal place of business is in one district to be-
in the adjoining district, but outside of that there is no provi-
ossible under the terms of the bill for a company doing busi-
ork to belong to a South Carolina bank.2

lot to render a policy point of view. There are compelling argu-
es of the question with regard to the advisability of multidistrict
rly our financial system has changed dramatically since the Sys-
ed in 1932 and the predecessor to the current regulator created
1 determined their locations and boundaries. In the intervening
ongress has revised the governing statutes on several occasions.
ess that these arguments should be offered and where any change
have to be made.

listrict membership represents a natural progression in the mod'HLBank System. We would only add our view that if multidistrict nsidered, it should be done within the general context of evaluHome Loan Bank System's charter.

ew of the FHLBank System

ne for such a review is near. Earlier this year, I requested the | Institutions Policy at the Treasury Department to conduct an inhe Federal Home Loan Bank System, with particular-but not extion of the effect of the changes enacted as part of the Grammof 1999 (GLBA). As I announced at that time, the review would

ges have affected the ability of the Federal Home Loan Banks to itory mission;

the financial strength of the Banks individually and the System ss operations of the Banks contribute to accomplishing their statu

g governance structure and management, including executive compital structures on operations; and

garding the strength of the System and the structure of Federal

bout 4 months into that process, nearing completion of the first
t phase, the staff conducted a general review of the literature, dis-
and developments to put a sharper focus to the questions to be
hey are preparing to go into greater detail. The initial step in the
be to discuss specific topics with the Finance Board.
es we will be looking at in greater detail include:

ntly changed the capital structure of the Federal Home Loan ed greater flexibility in the development of capital plans. What are nd differences among the various capital plans? How have the riskuirements been implemented? How will new capital plans impact ment portfolios?

ed mandatory membership requirements for Federal savings assonitted broader access to FHLBank membership for community fins (insured depository institutions with less than $500 million in at has been the impact of these changes in membership participachanges affected governance of the Home Loan Banks?

gs on S. 2959 concerning creation of the FHLBank System), 72nd Cong., 1st

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Advances and Collateral

The GLBA provided community financial institutions with a broader range of eligible collateral for FHLBank advances. The Finance Board reports that as of June 30, 2003, expanded collateral from community financial institutions represents approximately $10.6 billion of the $486 billion in outstanding advances. How has this provision been implemented by the FHLBanks and what factors impact community financial institutions use of the broader range of eligible collateral?

In addition to evaluating these specific legislative changes, over the last decade the activities of the Federal Home Loan Banks have evolved in many ways. Some specific activities that we will be focusing on include:

Balance Sheet Developments

How have key activities (advances, investments, and mortgage purchases) of the System and the individual Home Loan Banks evolved over the last decade, and what does this imply for the future of the System?

Advance Usage

What are the characteristics of FHLBank advance users? What types of advances are most commonly used by System members? What impact is it having on the activities of the members and their ability to serve their customers?

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 FHLBank System as part of 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 responsibility.

And before I leave this subject, with regard to regulatory oversight of the FHLBank System, I would like to commend Finance Board Chairman Korsmo for the increased emphasis he has placed on safety and soundness oversight, in particular the emphasis he has placed on the supervision and examination function. In recent years, many observers have pointed to weaknesses in the Finance Board's supervision of the Federal Home Loan Banks. Chairman Korsmo has given major focus to strengthening the examination process, doubling examination staff on the way to tripling it. I have no doubt that even further increases will be made as necessary.

As another related aside, I would like to raise a point about a legislative proposal regarding the membership of privately insured credit unions in Federal Home Loan Banks. As part of that proposal, private insurers of credit union deposits would be required to submit annual audit reports to the National Credit Union Administration (NCUA). In addition, upon the NCUA's request, the appropriate State supervisory agency would be required to provide the NCUA with examination reports of private deposit insurers. We are concerned that the provisions related to the NCUA could give the false impression that the NCUA has oversight authority over the private deposit insurers of credit unions and that the Federal Government somehow stands behind the private insurers. Not only would that be a terribly false impression potentially harmful to depositors, but it would also remove some of the market discipline that is so essential to the successful functioning of any private insurance program.

Conclusion

The Federal Home Loan Bank System presents policymakers with issues that deserve continued attention. The System has historically played an important role in our Nation's housing finance markets. 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 otherwise be met.

Thank you again for providing me with the opportunity to discuss these important issues with the Subcommittee today.

PREPARED STATEMENT OF JOHN T. KORSMO
CHAIRMAN, FEDERAL HOUSING FINANCE BOARD
SEPTEMBER 9, 2003

Thank you, Chairman Bennett, Ranking Member Johnson, and distinguished Members of the Subcommittee on Financial Institutions. I appreciate the oppor

th you today about the Federal Housing Finance Board (Finance leral Home Loan Bank System.

issues are facing the Nation's Government Sponsored Enterprises certainly, the Federal Home Loan Banks (Banks). I highlight ve steps we have taken at the Federal Housing Finance Board, ator, first, to strengthen the Agency's oversight capabilities; and financial disclosures by the Federal Home Loan Banks through ion with the Securities and Exchange Commission (SEC).

I will benefit not just the Federal Home Loan Banks and their is, but also the investors that purchase the Banks' debt, the taxately, the homebuying public who are served by the housing fie Banks.

Chairman Bennett's invitation to this oversight hearing, I will sues of multidistrict memberships in Federal Home Loan Banks ious Acquired Member Asset programs (AMA).

in by providing a brief overview of both the Federal Housing Fithe entities we regulate, the 12 Federal Home Loan Banks and

ce.

TH

BRA

using Finance Board is an independent agency in the executive . Government, with a five-member Board of Directors, four apesident and one ex-officio member, the Secretary of Housing and it. Created to take over certain duties of the Federal Home Loan e Financial Institutions Reform, Recovery, and Enforcement Act the Finance Board's primary duty is to ensure that the 12 Fedanks and the Office of Finance operate in a financially safe and Finance Board ensures that the Federal Home Loan Banks carry finance and community lending mission and remain adequately le to raise funds in the capital markets. The Federal Home Loan the Finance Board to examine and report on the condition of each in Bank at least annually. Finally, the Finance Board is a noncy that enacts its own budget; it assesses the Banks for the costs

ERA

Home Loan Banks and their joint office, the Office of Finance, v promoting the availability of housing finance, including commu, through 8,000-plus member institutions. The 12 Banks provide , low-cost source of funds to members and a secondary market fa-rtgages originated or acquired by their members. The Banks are members may own the stock of each Federal Home Loan Bank, receive dividends on their investment. Insured banks, thrifts, and insurance companies engaged in housing finance can apply for ne Loan Banks play a unique role in housing finance. They make ces, to their members and eligible housing associates (principally ance agencies) on the security of mortgages and other collateral members and housing associates. Advances generally support ons, provide term funding for portfolio lending, and may be used any member "community financial institution" (an FDIC-insured ssets of $538 million or less) for loans to small business, small agribusiness. Because portfolio lenders may originate loans they unable to sell in the secondary mortgage market, Federal Home es serve as a funding source for a variety of mortgages. This flexiadvances to support important housing markets, including those d moderate-income households.

BRA

ES

oan Bank advances can provide funding to smaller lenders that
ng sources. Smaller community lenders often do not have access
tives available to larger financial entities, including repurchase
ercial paper, and brokered deposits. The Federal Home Loan
enders access to competitively priced wholesale funding.
me Loan Banks principally fund themselves by issuing consoli-
which are the primary obligation of a sponsoring Bank or Banks,
and-several liability guarantee of all Banks. Consolidated obliga-
at June 30, 2003, totaled $712.4 billion. This includes bonds
of 1 year or longer) of $556.2 billion and discount notes (original
an 1 year) of $156.2 billion.

CON

more key figures: Total assets of the Federal Home Loan Banks on as of June 30, 2003. Advances totaled $506.3 billion, which is

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