Federal Home Loan Bank System

Reforms Needed to Promote Its Safety, Soundness, and Effectiveness Gao ID: GGD-94-38 December 8, 1993

In response to the savings and loan disaster, Congress overhauled federal regulation of the thrift industry. Many of these changes directly affected the Federal Home Loan (FHL) Bank System, which was established in the 1930s to facilitate mortgage lending to homebuyers. This report answers the following questions: Can the FHL Bank System pay its assessment for affordable housing and for cleaning up the savings and loan mess while carrying out its mission? What are appropriate capital standards for the FHL Bank system? Should the terms of membership in the FHL Bank System be changed? What is, and what should be, the role of the FHL Bank system in affordable housing, and how would system consolidation affect this? Should the FHL Bank System be allowed to offer new products and services? GAO also discusses needed changes in the corporate governance and regulation of the system.

GAO found that: (1) the FHLBank System should change the fixed nature of its obligations to one based on a percentage of System income to ensure continued payment in the future; (2) an improved set of capital rules would require permanent capital in the form of minimum required retained earnings and could lower stock purchase requirements imposed on System members; (3) making System membership voluntary and equalizing the terms of membership would promote efficiency and better service from the FHLBanks to their members, since mandatory and voluntary members introduce added risk into the System; (4) the FHLBank System supports affordable housing through traditional advances to its members and two targeted affordable housing programs; (5) FHLBank consolidation would not compromise the System's support for affordable housing; (6) FHLBanks should focus on preserving the System's mission and expanding FHLBank products and services; (7) oversight of all housing-related government-sponsored enterprises could be done more effectively by a single, independent regulator; and (8) the corporate governance responsibilities executed by the Federal Housing Finance Board should be given to the FHLBanks and their shareholders.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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