Con Hurley and I have been friends and colleagues for a very long time. Con was an attorney with the Federal Reserve in DC when I first arrived at the FDIC in 1978. He left the Fed to return to his native Boston and joined a leading regional bank. When I left the FDIC at the end of 1985, I formed a consulting firm — The Secura Group — and asked Con to join us and open an office in Boston, which he did quite successfully. These days Con is a professor at Boston University, among other things. He is an ardent Red Sox fan and a Democrat — he even ran for Congress years ago. Con wrote the article below, just published in the American Banker about reimaging the Federal Home Loan Bank System. He sent me a draft for review, and I found it so intriguing I volunteered to co-author it. Enjoy the read, as I believe the article is both thoughtful and thought-provoking.
A vital cog of the United States’ financial system is at risk. For 89 years, the Federal Home Loan Bank System has been a reliable source of liquidity for most of the nation’s banks, credit unions and insurance companies. Without meaningful change, this remarkable public-private partnership is nearing the end of its relevance.
Created in 1932 during the waning days of the Hoover administration, this intricate structure of 11 — 12 at the time — banks scattered across the U.S. has been a bulwark of our financial system. Member-owned but federally supported, these 11 banks have provided backup liquidity to their members through secured advances. The system is able to fund itself through debt obligations it issues that carry reduced risk premiums due to the implied guarantee of the federal government.
The Home Loan banks that make up the system are cooperatively owned by the financial institutions in their districts. This is in stark contrast with their distant government-sponsored-enterprise cousins, Fannie Mae and Freddie Mac, which were owned by profit seeking shareholders and are now in conservatorship. Each Federal Home Loan bank devotes a significant portion of its net income to affordable housing and to economic development in its district.
Through the Great Depression, numerous recessions, the Y2K scare, the savings and loan debacle, and other stresses in the financial markets, the system has been a stable source of funding for financial intermediaries. Long before the Federal Reserve rolled out its “urgent and exigent” instruments in the 2008 financial crisis, the system offered an oasis of funding when few others were in sight.