The Federal Home Loan Banks' Washington Advocate is Very Busy These Days
Also, Capital One supporters come out in droves at public hearing
Friday Q and A: The Federal Home Loan Banks have spent much of their nine decades of existence largely under the radar in Washington. But that’s changed substantially over the past two years.
Most notably, the FHFA, the federal overseer of the system, has been conducting an extensive review of their operations. It concluded in a November report that the banks have strayed from “serving their public purpose” of supporting housing and community development. Now the regulator is looking to make some fixes.
Scrutiny of the FHLBs on Capitol Hill has also grown in the wake of the regional banking crisis. Lawmakers are demanding answers about why they were lending billions of dollars to firms on the brink of collapse, potentially putting taxpayers at risk. And there have been pointed questions about how helping out Silicon Valley Bank, which catered to wealthy tech entrepreneurs and their businesses, can be squared with the system’s affordable housing mission.
We sat down this week with Ryan Donovan, who took the helm of the Council of Federal Home Loan Banks trade association in September 2022 – just in time to be really busy. A former head of advocacy at the Credit Union National Association, Donovan started his career working for his hometown congressman, Richard Gephardt. He later was an aide for Rep. Brad Sherman on banking issues. Read on for Donovan’s thoughts on the FHFA review, last year’s bank turmoil and why he’s warning those looking to make changes to the FHLB system that “if you break it, you buy it.”
What follows is our (lightly edited and condensed) conversation.
Capitol Account: You spent many years lobbying for credit unions. Was this job a big change?
Ryan Donovan: What I liked about the home loan bank system was that it’s just like the credit union system. It's a system of cooperatives. They're in the financial services space. They're mission driven – and they're doing great work. Those were things that I had advocated for in the past, and I knew I could do here.
CA: Step back a bit, and tell us what the home loan banks do.
RD: Our members are banks, credit unions, insurance companies, [Community Development Financial Institutions]. Our mission, if you had to put it in one sentence, is to provide liquidity to our members to support housing and community development.
CA: Liquidity is another word that not everyone understands.
RD: It's the lifeblood of financial institutions. What we try to do is give them the ability to take the assets that are on their books – in our case mostly housing-related assets, mortgages, mortgage backed securities – and they pledge them to us as collateral for loans. So that they've got liquid resources to make additional loans.
CA: Not unlike what Fannie Mae and Freddie Mac do?
RD: We're set up to do it differently. We do have an asset acquisition program, where we will buy mortgages from our members. But the primary book of business is…making loans to our members.
CA: Fannie and Freddie are, of course, political lightning rods. FHLBs aren’t close to that, but there has been a lot more attention lately.
RD: This has been a sleepy area. The home loan banks haven't had a history of telling their story, raising their head above the water line. But over the last two years, we've done that. We've really had to do that in the wake of FHFA's review.
CA: The agency’s report, “The FHLBank System at 100: Focusing on the Future,” is billed as the first extensive review of the institutions in decades.
RD: Congress certainly has done that periodically…They've made changes to our mission, to our powers, who we can serve and the type of collateral we can take. They've done that, I think, in recognition of what the market needs at any particular time throughout our history. FHFA says, `Hey, this is the first comprehensive review of the system,’ and that certainly is the case with respect to that agency. But…Congress has looked at us, and they've updated our statute as necessary.
CA: The FHFA effort is very focused on affordable housing, and its report has suggested some sweeping changes. What do you think?
RD: Certainly one of the themes raised during the review was, what's our nexus to housing? Today, the nexus to housing is in the collateral that we can accept. It's what Congress has said we're allowed to accept. There are voices out there that think that that should mean something else. That's what FHFA is exploring. From our perspective, the world is the way that it is today. If it's going to change, Congress ought to be the entity that changes it. Not FHFA.
CA: Toward that end, you recently responded to the agency’s request for public comment on the FHLB’s mission, and highlighted the recent Loper Bright Supreme Court decision that limited agencies’ leeway in exercising their power. Is that a warning?
RD: It was about 200 words of a 6,000 word letter. Frankly, I think it would've been malpractice not to. It's out there, and it needs to be recognized.
CA: This was in context of a push by the FHFA to get the home loan banks to offer new financial incentives in an effort to get members to increase their support for community development.
RD: [FHFA is] focused on whether or not they should require the banks to implement incentive programs. What we discussed is that Congress has already provided incentive programs…They didn't convey authority to FHFA to require additional ones.
CA: What’s the bigger point you want to make?
RD: Through that comment letter, and I think through our other advocacy, we're trying to articulate: Hey, this is where we think the box is. We're operating squarely within that box. And if the shape of the box has to change, Congress ought to be the one to change it.
CA: What are you most concerned about in the FHFA review?
RD: I'll be honest, we do have a lot of concerns…But more generally, anything any government agency does – whether it's FHFA, the Fed, Treasury – that makes it more complicated for our members to access the home loan banks, reduces our value proposition. Because it's harder for us to lend.
CA: It sounds like your general position is, if it ain’t broke, don’t fix it.
RD: Yes, if it's not broken, don't fix it. But if you break it, you buy it. That's what the real concern is. That's why we gave a constructive response to the [agency’s request for input]...I don't think policy makers want to be responsible for breaking it.
CA: This is a long process and the FHFA is going to need to adopt rules in some cases and in others Congress may need to act. But the home loan banks have also already moved to make some changes on their own.
RD: We're not ignorant of the housing affordability crisis in this country. We listened closely during the public input part of the review to what stakeholders had to say – and they said that they wanted more from the system. We didn't wait for FHFA to produce their report before we started to act on that feedback.
CA: The law requires the banks to contribute 10 percent of their net income for affordable housing programs, and last year the banks announced they’d boost that to 15 percent.
RD: That was the first thing that we did. As a result, we expect to contribute $1 billion to affordable housing and community development this year. That will be a record number for us.
CA: What’s your assessment of how Director Sandra Thompson is doing at FHFA?
RD: She has an enormous responsibility. We're – depending on how you look at it – either one-third, or maybe even less, of what she's responsible for. She's in this job at a critical time. I think every regulated entity would hope that they have a better relationship, at least in terms of lines of communication. That's something that we're working on. She's been very fair to me in my role, and I've been greatly appreciative of that.
CA: As FHFA presses ahead, there’s an election months away. Are you concerned that this is all happening as a new administration, with very different priorities, could come in?
RD: Every industry group that is subject to any form of regulation and/or supervision by the federal government is concerned about the regulatory pendulum….We've got to be able to work with whoever is in charge. To do that, we've got to make sure that folks understand what we do, how we do it and what the impact is.
CA: The regional bank crisis also thrust the FHLBs into the political spotlight. Democrats, especially, have been asking why they lent so much money to banks that catered to wealthy tech executives or the crypto industry – and wondering if taxpayer money was put at risk. Is the criticism misguided?
RD: There's a lot in that question. I'll start at the end – is taxpayer money at risk? All the capital in the home loan bank system is member capital. We don't get an appropriation.
CA: What about the notion that the system is subsidized by the taxpayers?
RD: There's a lot of talk about a so-called subsidy, but when you peel that back, it's pretty easy to recognize that if there is a subsidy, it's being paid by the investors in our debt that take a lower return…They look at us and they say, `Hey, there's a great structure here that [shows] this system is safe and sound, and my investment is going to be strong in this system.’
CA: Talk about the home loan banks’ role during the regional bank panic.
RD: When the failures took place, our members turned to us for stability – and we provided that stability…We had about $810 billion in advances outstanding, and at the end of March 2023, we peaked at about $1 trillion. Our balance sheets are designed to expand and contract to meet our members' needs.
CA: Is that how it’s supposed to work?
RD: The [Government Accountability Office] looked into our activity in March of 2023, and they said that we provided crucial liquidity for our members in the exact way that Congress intended. And that we worked tirelessly, and in a coordinated manner, with the Fed and with the other bank regulators, to address the disruption and ensure that there was safety and soundness in the system.
CA: You felt like it was a success?
RD: We were absolutely critical in providing stability during those early days and weeks, while the Fed worked to stand up an entirely new facility to try to deal with the crisis.
CA: The Fed’s discount window is known as the lender of last resort, but banks have been wary of tapping it because they don’t want the market to find out they’re getting emergency help. What's the difference when they turn to a home loans bank?
RD: Our record in all economic environments suggests that our members don't see a stigma in borrowing from us. They see us as a partner. And that makes a lot of sense because we're cooperatives. They own the place.
CA: Some lawmakers and regulators want to make changes in how the discount window is used. One suggestion is requiring banks to pre-position collateral at the Fed. What do you think?
RD: There are a lot of proposals with respect to discount window reform…that could have an adverse impact on the home loan bank system, and more importantly, on our members' ability to access the system. If you're parking collateral at the Fed, that's collateral that's not being used for additional lending. If you brought that to the home loan bank, you could draw on that and use it for additional lending. If those proposals have the impact of reducing credit availability, it's going to make it more expensive for consumers. And it's hard to see how more expensive credit helps us do anything to address housing affordability.
CA: What do you do for fun?
RD: I coach a 14U travel softball team, and I've been doing that now for about four or five years. My younger daughter plays on the team. She's a pitcher. It is a tremendous escape from the day-to-day, so I really enjoy that.
CA: That’s probably a very different crowd than you hang out with at work.
RD: I'm not sure there are many people that say, `Hey, I'd really like to go and spend ten hours a week with twelve 14-year-old girls.’ But compared to some of the things I have to deal with here in Washington, it's pretty nice sometimes.
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Merger Mania: Liberals’ intense hostility for Capital One’s proposed acquisition of Discover Financial Services was on full display at today’s virtual public hearing held by the Fed and OCC. Yet the vitriol was offset by a flood of testimony from non-profit executives and small business owners who raved about their experiences with the credit card giant.
While the supporters didn’t exactly drown out the other side, they succeeded in painting a softer picture of a lender that some on the left have vilified as untrustworthy and preying on lower-income borrowers.
The Fed and the OCC consider how a merged bank will benefit the community when evaluating deals – making lenders’ records as a corporate citizen fair game.
Capital One’s Richard Fairbank was the day’s first speaker. “This transaction brings together two great companies with track records of success, award-winning customer experiences and their commitment to financial inclusion and community service,” he declared.
The CEO touted the $265 billion commitment to aid underserved borrowers that Capital One unveiled earlier this week, calling it the “largest ever” of its kind. He also boasted about the company’s success boosting up subprime borrowers. “The goal isn't just to offer credit cards,” he said. “The goal is to help these consumers use credit wisely and to graduate into the mainstream of prime credit access.”
A chorus of fans throughout the day shared anecdotes about working with the bank (though often without commenting directly on the merger itself). Capital One has been “a remarkable community partner” in efforts supporting youth development and affordable housing in Baton Rouge, Louisiana, Carl Dillon of the Urban Restoration Enhancement Corporation testified.
Rachel Glassman of D.C.-based Miriam’s Kitchen talked about how the $140,000 the credit card issuer has donated to the group, along with “many hours of volunteer support,” have helped the homeless.
Business partners also spoke. Moses Foster, the CEO of Richmond-based marketing firm West Cary Group told a story about how, during the pandemic, the bank paid his firm extra quickly to help it stay afloat. “Capital One went above and beyond to ensure we remained anchored and stable,” he said.
A smaller, but vociferous, slate of detractors urged the Fed and the OCC to reject the deal. They argued that Capital One’s purchase of Discover would eliminate a major competitor, allowing the combined firm to hike rates and fees. “Today, Discover plays the role of maverick in the market, offering better service and lower prices about two percentage points cheaper than the other cards,” noted Patrick Woodall, policy director for Americans for Financial Reform,.
Opponents also worried the deal would harm merchants by allowing Capital One to control a major payments network. Unlike Mastercard and Visa, Discover is exempt from a statutory cap on the “swipe fees” banks charge merchants when their customers use debit cards. “This loophole gives Capital One the legal ability to raise debit interchange fees with American businesses, who would be forced to accept its debit cards or lose access to its credit customer base,” Cornell Crews Jr., the executive director of the Community Reinvestment Alliance of Florida, stressed.
Maxine Waters, the top Democrat on the House Financial Services Committee, warned that the merger would create another too-big-to-fail bank. She noted that the new entity would be “roughly $100 billion larger than the combined size of the three banks that failed last year.” Waters, the only member of Congress to speak at the hearing, called on the Fed and the OCC “to stop rubber stamping mergers.”
Capital One’s lending practices also came up quite a bit. The bank’s “pattern of targeting vulnerable communities with high-cost products that trap them into endless cycles of debt should disqualify it from acquiring Discover,” contended Leila Amirhamzeh, the director of community reinvestment for New Jersey Citizen Action.
The benefits agreement was another point of contention. National Community Reinvestment Coalition CEO Jesse Van Tol argued the $265 billion total exaggerates the promises the lender is making. For instance, he said, the plan’s $45 billion pledge for community development financing doesn’t appear to be an increase from what the two firms have already been doing. “The banks’ past performance suggests a run rate of almost exactly $44 billion over five years,” he emphasized.
Some advocates also complained about being shut out of the process for developing the agreement. The four non-profits that worked with Capital One to develop the details had to sign non-disclosure agreements. Peter Hainley, the executive director of CASA of Oregon, argued this created a “flawed process” that missed an opportunity to gather broader input.
Next Week:
On Tuesday at 10:00 a.m., the House Financial Services Committee holds a hearing on AI.
On Tuesday at 3:30 p.m., the Senate Permanent Subcommittee on Investigations holds a hearing on Zelle fraud, featuring executives from JPMorgan Chase, Bank of America and Wells Fargo.
On Wednesday at 10:30 a.m., the House Financial Services housing subcommittee holds a hearing on red tape in the housing market.
On Wednesday at 2:00 p.m., FDIC Vice Chairman Travis Hill speaks on changes to bank regulation at the American Enterprise Institute.
On Thursday at 10:00 a.m., the Senate Banking Committee holds a hearing on export controls with representatives of the Departments of Commerce, Treasury and Defense.