How FHLBs Miss the Mission, Heighten Financial Risk
Recent revelations about the Federal Home Loan Bank System have made it still more imperative to address whether at least $1 trillion of implicitly-guaranteed federal debt should be authorized to feather the FHLBs’ pockets instead of furthering public welfare.
Recent revelations about the Federal Home Loan Bank System have made it still more imperative to address whether at least $1 trillion of implicitly-guaranteed federal debt should be authorized to feather the FHLBs’ pockets instead of furthering public welfare. As we detailed in a recent client report, flat-out mission contradictions are clear in the case of a crypto-heavy bank’s use of FHLB funding as a lifeline which it surely obtained because the System can lend with impunity because it has a prior lien ahead of even the FDIC. However, this case isn’t the only current mission conundrum. The other is little-noticed but at least as problematic: the extent to which Home Loan Banks lend not to support homes, but instead to give foreign banks in the U.S. a tidy revenue source via a nifty interest-rate arbitrage play that disadvantages U.S. banks and may even threaten financial stability and monetary-policy transmission.
But first to the question of whether the FHLB System is required to do better. It would seem totally obvious that Home Loan Banks issue debt through the System’s Office of Finance thanks to taxpayer benefits. However, in connection with a discussion of the prior lien, an FHLB spokeswoman said the System operates without any resort to taxpayers. Leaving aside the fact that the Banks don’t pay taxes and couldn’t raise hundreds of billions at near-Treasury spreads if they weren’t cushioned in the taxpayers’ bosom, the law says these entities are agencies of the U.S. Government and regulates …
OFR Tackles Repo-Market Data Transparency
As pressed by the FSOC (see Client Report FSOC28), OFR today released a sweeping proposal to gather daily data on the uncleared bilateral repo market. The proposal follows a data-collection pilot that leads OFR now to detail 33 daily reporting items that would be collected from the forty largest bank and nonbank primary dealers in this systemic-critical sector.
OCC Reiterates Long Term Principles
The OCC today published its 2022 Annual Report, revealing little of its priorities for 2023. It does, however, reiterate long-term goals laid out by Acting Comptroller Hsu, including guarding against complacency, addressing inequality, adapting to digitalization, and managing climate risk.
A Pragmatic Vision of a Purposeful Home Loan Bank System
Although a new paper by former FRB Gov. Tarullo and Fed staffers on the FHLB stirred considerable consternation across the Federal Home Loan Bank System, it’s a crushing and persuasive critique of a giant GSE that has long preferred to go unnoticed. That’s not unreasonable since the System has evolved from an essential small-bank funding source for mortgages into a taxpayer-subsidized capital-markets investment option. When public wealth is not allocated for public welfare, resources are misallocated and market integrity is compromised. But, unless the Home Loan Banks blow themselves up, they are here to stay. Thus, the policy challenge is not how to abolish them, but how best to redirect an established funding channel back to servicing the public good. Traditional single-family mortgages don’t need the Banks anymore, but much else does.
Although a new paper by former FRB Gov. Tarullo and Fed staffers on the FHLB stirred considerable consternation across the Federal Home Loan Bank System, it’s a crushing and persuasive critique of a giant GSE that has long preferred to go unnoticed. That’s not unreasonable since the System has evolved from an essential small-bank funding source for mortgages into a taxpayer-subsidized capital-markets investment option. When public wealth is not allocated for public welfare, resources are misallocated and market integrity is compromised. But, unless the Home Loan Banks blow themselves up, they are here to stay. Thus, the policy challenge is not how to abolish them, but how best to redirect an established funding channel back to servicing the public good. Traditional single-family mortgages don’t need the Banks anymore, but much else does.
The paper’s criteria for considering taxpayer subsidies are a very helpful guide for moving forward and thus worth quoting at length:
“There is, of course, nothing inherently wrong with government subsidies. But subsidies should meet two conditions if they are to be sound public policy. First, they must be shown to be correctives for identified market failures or instruments of targeted redistribution policies. Second, there must be governance mechanisms to ensure that the subsidies are used to achieve the ends specified by the legislature or regulator, and not for other purposes.”
I suspect the authors would agree with a third point: if a credible, forward-looking case for the subsidy cannot be made by virtue of demonstrable public benefits …
Powell Ponders the Dollar
In remarks today at a conference on the dollar’s reserve-currency status, Chairman Powell highlighted Fed actions to ensure that the dollar is not only an essential global payment instrument, but also a stable one.
Republicans Prepare to Investigate SEC over Climate-Risk Disclosures
In a letter to SEC Chairman Gensler, Senate Banking Republicans upped their campaign against the SEC’s proposed climate disclosure rule, asking the Chairman to provide all written communication related to it.
Chopra Redoubles Plans for Innovative Standard-Setting, Tough New Rules
In a sweeping statement today, CFPB Director Chopra strongly defended his agency’s unusual approach to recent guidance and rulemakings as well as detailed ongoing priorities.
BIS Announces New Crypto, Cybersecurity, and Green Finance Projects
The BIS Innovation Hub today updated its 2022 work program with several new projects on cryptocurrency, cybersecurity, green finance, and CBDC.