Thank you, Chairman D’Amato, Ranking Minority Member Sarbanes, Senator Hagel, co-sponsors of S.1423 and other members of the Committee, for allowing me, as one of four Directors of the Federal Housing Finance Board, this opportunity to offer my comments on S.1423 regarding Federal Home Loan Bank System Modernization. My comments are my own and not that of the other members of the Federal Housing Finance Board.

I want to focus my remarks on two separate initiatives of S.1423 that directly relate to the strengths of the Federal Home Loan Bank System. If enacted, one of these initiatives would fully utilize the strength of the System’s Government Sponsored Enterprise status; the other, if enacted, would harm what, I feel, is one of the greatest strengths of the System.

The first initiative is most urgent and carries immense benefits for America’s rural lending institutions. This initiative would eliminate the 10% minimum residential assets eligibility test for banks under $500 million in assets (Sections 2 and 6) and would include small business loans as eligible collateral for these banks (Sections 2 and 5).

The Independent Bankers Association of America (IBAA) estimates there are 3,175 commercial banks in the heartland, of which 94% are community institutions and this constitutes 35% of all community banks nationwide. Presently, declining deposits at these banks threaten to create serious liquidity problems for America’s heartland if Congress fails to act. Many recent articles have described rural bankers’ desperate need for access to low-cost funding in order to fully serve the farms and small businesses in their communities. In September of 1997, the chairman of the IBAA’s Agriculture-Rural America Committee, Terry Jorde, testified before the Senate Agriculture Committee and stated, "The issue isn’t a lack of competition, but whether community banks will have access to adequate funding sources and how much this funding will cost." She suggested Congress could relax Federal Home Loan Bank eligibility and collateral standards for rural banks. Senator Bob Bennett has also stated before the Senate Agricultural Committee that small rural communities "find direct investor access too expensive and difficult for their relatively small needs." Senator Bennett stated, "GSE financing offers one of the most effective approaches to opening up the potential that rural America offers."

In S.1423, the provision that eliminates the 10% residential assets test for financial institution members under $500 million would benefit 1,258 non-customer banks, including 788 rural banks. The provision allowing banks under $500 million to pledge small business loans as collateral would allow $82 billion to be available in additional collateral to secure Federal Home Loan Bank borrowing for rural communities, and would allow small banks to borrow to fund small business and agricultural loans. Senator Bennett is correct: the GSE status of the Federal Home Loan Bank System would make a profound difference for America’s rural banks.

The second initiative that, if enacted, could harm one of the strengths of the System relates to the director positions on the Federal Housing Finance Board (Section 15). Section 15 of S.1423 would add the Chairperson of the FDIC (or his or her designee) as a member of the board of directors of the Finance Board, in place of one of the appointive director positions. The House version of this provision (Section 179, HR 10) prefers a Treasury Department representative versus a FDIC representative on the Board. This proposed change would end 65 years of independence for the regulator of the Federal Home Loan Bank System, and given the System’s glorious history through some rather tumultuous times, I think the regulator’s independence has served the United States well. I strongly feel that having the Treasury Department represented on the Board impairs the mandated independence of the Board. While the Senate version is not as harmful because the FDIC is an independent agency, I am opposed to the Senate provision nonetheless because the President appoints the Chairman of the FDIC and this would, again, not allow for Board independence. I prefer the status quo that allows for a Board independent of the Administration, especially since safety and soundness are not, and should not be, partisan issues.

In conclusion, an urgent need for liquidity exists in the heartland and in small communities throughout America. Rural lending institutions are experiencing the loss and/or stagnation of their core deposit base. Congress can address this urgent need by tapping into the strength and mission of the Federal Home Loan Bank System. On the other hand, Congress could weaken the System’s time-honored strength by changing the representation on the Finance Board of Directors and, thus, curtailing its independent status.

Thank you.

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