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Bankers’ resistance to meaningful reform of their federal home loan banks invites filmmaker Frank Capra.

It’s Christmas 2022. Old Potter needs cash to run his bank. He has two choices. He can raise the interest he pays to depositors from the current less than 1 percent to 3 percent and raise funds. Or he can borrow from his Uncle Sam on Wall Street at 2 percent. Sam is happy to oblige because his cost of funds is less than 2 percent thanks to a hefty taxpayer subsidy on his debt.

Potter is a bully, but he’s not stupid. As he has done for decades, he chooses to borrow money from Sam. Bedford Falls residents are getting poorer. Potter is getting rich. So does Sam.

Word is out of this arrangement, and Clarke, a keen newspaper reporter, manages to corner Potter for a brief interview. He asks Potter why he went to New York with his uncle instead of going with his neighbors to get money. Potter responds defensively, saying it’s not because of “greed” but because he needs to manage the “liquidity” of his bank.

“Plus,” adds Potter, “the money borrowed from Sam goes back into the community in the form of mortgages on family homes.”

Clark answers. “Wait, your bank stopped lending on 1-4 family homes years ago.” A visibly irritated Potter replies. “Maybe so, but Sam makes affordable housing loans at below-market rates.”

Clark does some research and discovers that Sam does not make any affordable home loans in Bedford Falls or any of the surrounding towns because Potter, like most of the other bankers, does not participate in Sam’s affordable lending programs. Clarke also finds that Sam’s support for affordable housing is minimal. He calls Potter for an explanation. Potter never answers his phone.

And so it is business as usual for Potter and the good people of Bedford Falls.

It’s a familiar story. Potter means any banker you may know. His Uncle Sam stands for our Uncle Sam and, in this story, Uncle Sam’s descendants for the Federal Home Loan Banks.

No doubt you’ve wondered how today’s Potters get away with paying less than 1 percent on savings accounts while loan rates soar. Last week, the Wall Street Journal reported that if the five largest banks paid competitive rates on their savings and money market accounts, they would put $42 billion in customers’ pockets. only in the third trimester. But why do that when you have Uncle Sam (FHLBs) to borrow from cheaper?

Bankers are reluctant to give up this cheap source of taxpayer funding and the rich stream of dividends that come from paying FHLBs. They and their lobbyists have continued this arrangement for decades, pitting the bank’s customers against their own government. For this they create three fictions.

First, it is a myth that FHLBs’ loans to their members contribute to housing. They are not. This was confirmed by the Government Accountability Office when it found “limited empirical information” that FHLBs are fulfilling their housing or community mission. The second is the fiction that bank liquidity is a public good. It is not. Liquidity is code for “profit”. Profit is a private benefit. Third is the fiction that FHLBs are serious about affordable housing. They are not. Less than 5 percent of FHLBs’ $6.3 billion in annual taxpayer subsidies finds its way into affordable housing.

Stripping away these fabrications reveals the disparity here.

Now, after nearly 100 years and a succession of complacent regulators, change is afoot. The regulator of FHLBs, the Federal Housing Finance Agency, has undertaken a “comprehensive review” of FHLBs. Not an ordinary overhaul, this bill narrows the FHLB’s mission.

This is a shocking turn of events. Never before has a regulator in any part of the US economy called for a top-down reevaluation of the very industry it regulates.

Bankers warn the regulator and the public. “Don’t mess with success.”

Despite the warning, the Brookings Institution and Boston University will hold a symposium this February in Washington, D.C. to chart a better course for FHLBs and the nation.

Stay with us.

Cornelius Hurley teaches financial services law at Boston University Law School. He served as an independent director of Federal Home Loan Bank of Boston from 2007 to 2021.


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