This is Mark Treichel with another episode of With Flying Colors. I'm excited today to be here with Ryan Donovan. Ryan is the president of the council of federal home loan banks, and the council is dedicated to enhancing public awareness and understanding of the federal home loan bank system. It is also the primary public voice of the federal home loan bank system, and its function is to represent positions and views of its members to Washington DC policy makers.
Ryan, how are you doing today?
I'm doing great, Mark. Thanks for having me.
We ran into each other last week at NCUA Board Member Rodney Hood's event in New York City on capital markets, and that was a great event.
I've always enjoyed chatting with you from your time back at CUNA.
I think it was less than a year ago maybe that you moved over to the Council of Federal Home Loan Banks. Do I have that right?
Yeah. Absolutely. I moved over in September. And it has been a little bit like diving into the deep end of the pool on the first day of summer. Yeah. It has been just exciting and sort of anxiety driven but thrilling and paralyzing all at the same time.
I am sure it has been like a roller coaster.
In my time at NCUA I had a lot of work in troubled type credit unions, and we would see federal home loan banks in good credit unions and in credit unions that had some challenges, but the FHLB always played a great role as a liquidity source.
So when you moved over, I had you on a short list of folks I wanted to chat with about what was going on, and I've said in several of my podcasts, it seems like liquidity doesn't matter until it matters, and then it's the only thing that matters and we've seen some institutions dealing with that, which is probably one of the things you were you were referencing there.
Let's chat a little bit about what's been going on in the land the Federal Home Loan Banks from where you sit over the last year.
Well, about two weeks before I started at the council, the Federal Housing Finance Agency, which is the primary regulator for the home loan banks, announced a comprehensive review of the system.
Last year was the ninetieth anniversary of the system and what the FHFA intends to do through this review, which is ongoing is look towards the future, what should the system look like at its centennial ten years from now?
And is it relevant in today's market and will it be relevant then?
And they conducted all of these round table meetings about nineteen of them around the country.
They've had multiple days of listening sessions, a couple of comment periods.
The listening stage of that process has come to a conclusion but now the agency is going to work on this report. And this report is really, I think, going to give recommendations for legislative changes.
There'll be, I think, a list of regulatory changes the agency might try to undertake, and I imagine some other thoughts and observations based on what they've heard. Until the middle of March, it has been the crux and the focus of what I've been doing at the at the council: helping the banks engage in that process, navigate through that process.
And then also in March, of course, we were all reminded just how important liquidity is to, as you say, to both institutions that are in great health and institutions that may be troubled.
And that was where the home loan bank system, I think, again, showed what it does really well for its members, which is to be a reliable and readily accessible source of liquidity.
And so it's been exciting, and I'm happy to dig deeper into some of those issues.
In preparation for our call, I went back to look at some of the numbers I'd seen recently, but the Federal Home Loan Bank system issued per one of the stories issued three hundred and four billion in debt.
Around the SVB event and/or the few days after that, really, really big numbers, or the almost double what the Federal Reserve was doing.
Let me let me jump in on that, Mark. And just the Monday after Silicon Valley Bank failed, the home loan bank system had its largest debt issuance on a on a single day as far as we know ever.
And in that week, I'm told we issued more debt than we'd ever done in a in a month. And so what that shows is there's a lot of market confidence in the home loan bank system and the role that we play and it really demonstrated the ability of home loan bank balance sheets to be elastic, to grow when our members need it.
Then what you'll see, I think, in the in the next several weeks and months, is that it'll shrink again back to a normal size. And that's exactly the way that it is designed to work.
The other thing that I would point out, you mentioned that the number may have been double what Federal Reserve was able to do or did. We saw similar things happen in both the COVID crisis and also in the in the great financial crisis where federal home loan banks were able to be sort of that “first responder” and get in there a little bit ahead of the Fed.
Again, that's also, I think, a design feature, not a design flaw of the system.
I think the word of caution and I know you know this as well as anyone that I would offer is that where we see a lot of light shine on the system right now in a period of turbulence. But every day, the home loan bank system is there for their members, making sure that they have access to this important liquidity.
As we're talking through that, I'm reminded a gentleman from NCUA who retired recently -Owen Cole, and one of his lines, he would always say was “you don't want to close the fire station just because you haven't had a fire for the last six months. Right?
You said the FHLB is a first responder. And to have that first responder there and another phrase you mentioned is the market confidence.
So when I hear the market confidence, it's when you have someone who's going to need the money from the federal home loan bank on the other side, you've got Wall Street types that are out there willing to buy it because they know the federal home loan banks quality, and they know that they're going to buy when they buy something, they're getting what they think they're getting. And then on the on the bank side or credit union side, you know that the Federal Home Loan Bank's going to be able to get as long as business day hasn't closed, it probably is going to work out that or the next day to get the funding that they need.
That's exactly right. We're at the end of the day, home loan banks are cooperatives. Right? Just like credit unions are cooperatives. And they're going to work with their members and do what they can to make sure that their needs are met. And we did that in this last crisis, and we try to do that every day.
Another thing I recently saw in the press was a was a really interesting quote from let's see. Jim Barrett, who was a former Obama administration, housing adviser, and Mark Zandi, who works at Moody's.
They communicated this in a report and also to the Biden Administration that the federal home loan banks are vital sources of liquidity for financial institutions and act as you said as a first responder in crisis. If anything, the system should be expanded, they wrote in an urban institute paper.
They went on to say without the federal home loan banks, these downturns in the economic cycle would have been significantly more painful with greater swings in the cost and availability of credit, exacting greater damage on the economy. So any thoughts relative to that article if you've read more on it?
Yes. I've read it.
And with any report of that nature, there are there are things to take away that you absolutely agree with and there are things that are under something said that you're like, oh, I wish maybe they hadn't gone that far, but what I think that that paper does is it really gives a great overview of how the system works and why it is critical to the financial sector in the financial system.
They did a really, really great job with that as you would expect, and I think it's a really helpful piece at this time when the system is under review. And, frankly, at a time where we're trying to do more to tell the story about the Federal Home Loan Bank system. It's not well known among the public because the public doesn't have day to day interface with it. It can be well known among our members. They probably know how they interact with the bank that they may be a member of and maybe not much else.
What that paper does is it really does a great job for someone like me who's six or seven months into it to help folks understand how the system works.
I recommend it as a reading, absolutely.
Well and a couple of things they're highlighting. So, one thing I learned recently was about the affordable housing mandate where certain percentages of income the federal home loan banks are required to give to affordable housing. And I think there's also some FHLBS who decided to give more? While the law requires x, the banks are giving x plus y for affordable housing.
Any thoughts relative to that?
You're raising a really important point, and this was actually a very critical focus of FHFA's review process.
I think most of the round table meetings that they had focused in some form or fashion on affordable housing community investment how the home loan banks, and their members are meeting the needs of underserved, rural, and tribal communities.
The agency spent a great deal of time focused on this. And it's important that they did. There is a home ownership crisis or a home affordability crisis in the country.
There's a home ownership gap. And certainly, part of what the home loan banks do is to try to make home ownership more affordable for everyone.
Now take a step back for a moment because over the years, the mission of the home loan bank system has been changed by Congress. And so in the beginning, it was really to support lending by thrift institutions. Over the course of our history, Congress has added membership classes, allowing commercial banks allowing credit unions and CDFI's and privately insured credit unions to join.
Also changing the type of collateral that can be accepted by certain institutions, allowing community financial institutions to pledge small business loans and agriculture credits as collateral.
This has evolved from what it started out as in the nineteen thirties. One of the things that they have added to the mission is a focus on affordable housing and community development, and Congress in the late eighties added a requirement that ten percent of net earnings essentially go each year into the affordable housing program.
And today, most of the banks do contribute more than the ten percent to and do a voluntary contribution.
And as part of this process, we've been listening to stakeholders and all of the federal home loan banks have committed to doing at least fifty percent more than the 10 percent required.
So that we're contributing more to those important programs.
Now we've also recommended that FHFA look at the affordable housing program and the regulations around that and try to simplify that so the dollars that are going into that program have greater impact. And certainly throughout the review process, the agency heard a lot from stakeholders about how inefficient that that program has been. So we're hopeful that they'll listen to those concerns as well.
That's great. So you mentioned the Federal Home Loan Bank starting in the nineteen thirties tied to supporting mortgage lending.
And it has morphed and taken on additional responsibilities to its mission as Congress has made changes in that. when you hear criticism it’s that people tend to focus just on that original mission and tend to lose the fact that more and more has been woven in, and maybe they'll say, well, why should insurance companies have access to it? When the original mission was supporting mortgage lending.
But along with that is community investment and this great source of liquidity.
I think of another I like quotes. I like quotes too much, but there's a quote that says, don't take a fence down before you know why it was put up. I think it really fits because the fence has been woven around this community that the federal home loan banks serve and any tweaks to that is going to put a hole in that fence. And I think there's unintended consequences that I think if if anyone tries to mitigate what you're allowed to do, I don't think they quite understand the ramifications of what that might mean. Even if it is just as simple as on that Friday in March and that Monday during Silicon Valley Banke not having the flexibility to do what you did to help during that crisis.
At the one of the final listening sessions, I cannot remember who said it, but a similar point was made. If you break it, you buy it. Right? And it's so you're looking at a comprehensive review and you've kind of asked folks for Blue Sky recommendations and you're taking all of that in, how you aggregate that, and what comes out in that product is really important because if you take those ideas and you don't fully vet them and you don't analyze them and you just put them out as recommendations and somebody picks that up and runs with it, the chances are good that there will be some form of unintended consequence.
I thought the point was very well made at the listening session, but Mark, you just said it better.
If you don't know why the fence was built, don't tear it down. Don't take it down. Don't take it down.
Absolutely. You said this is so it's the ninetieth year of the of existence. So, this report, the goal is to be ready for ten years from now. And as you said, there could be recommendations, there could be proposals, in the in the reality of how things slow things move in Washington, D. C. Right now, it's not one party in full control where you might see things moving quicker. Right?
That's a really important question, Mark. Because one of the things when I when I first came into the system and this process was getting underway.
What I advised folks was that do not view the report as the end game of this process. This report will go to Congress, it'll be made public, and the agency may try to implement what they can through their regulatory powers.
But it's going to exist until the next report.
I think in the credit union space, you can remember Government Accountability Office (GAO) reports that may not have been favorable to the credit union industry and we would hymn and holler about them and worry about them and talk about them until the next report came out. Right?
And I think this is a similar situation where when the agency puts this out, some of it, they will try to they will try to put into place through regulation. But they're going to send some legislative recommendations to congress, and it would be easy to say, well, we don't have to worry about Congress doing anything, but it would be foolish to say that as well.
And the reason it would be foolish is because there's going to be an election in 2024 and we'll get a different Congress. We might get a different administration. And sooner or later, the stars could align for there to be both the will and the ability in Congress to move legislation.
The other thing that I'm mindful of in the present day is that coming out of this recent banking disruption, it's possible Congress could move some legislation related to that maybe on executive compensation claw back or on deposit insurance or some other aspect of the of the recent banking liquidity issues.
And changes to the home loan bank act may be considered as part of that. So, we always have to be on guard. We always have to be ready for that, but the report is definitely not an end game.
Whether Congress acts on it in the short term or the long term, we've got to be ready to stand behind our views on the recommendations when they come in. S
Sure. you've got to be ready for that full court press. You might need it tomorrow. You might not need it for a few years, but you better be ready for it for tomorrow. Right.
Well, when I was at NCUA for thirty three years working with CUNA and working with NAFCU and having the NCUA Board members walk across the hall and say CUNA or NAFCU was in here making suggestions x y I and z.
A lot of times, as a staff member, in the short term, it made my job a little harder because staff was ready to go in one direction, but the trade associations would point something out where it would need some further dialogue. Now on the outside looking in and having a different view from where I sit, I truly embrace thatI really see the importance of always having the trade associations there on the ready to make those comments because the NCUA board listens, and then staff listens. the board Would remind staff that they led the agency and staff didn't. And perhaps it was a public policy issue that needed to be done for the greater good.
I always respected what the trade associations did and do -and then to see you step in eight months ago to this new role , when the stormy water started coming in. Kudos to you.
Well, thanks, Mark. It's a feature of our of our democracy and of our of the way that we make public policy that there is an opportunity for stakeholders to have input on regulatory decisions and on the legislative process. Hopefully It's done in a way that makes the end product better, keeps the process fair for all involved, and certainly, that's really critical for everybody in that process to respect the roles that everyone plays.
As an advocate, clearly, we have to respect the roles that the folks, in our case, at FHFA or at the banking regulators or at NCUA, play and making sure that the institutions that they regulate are operated in a safe and sound manner. And likewise, it's always good when a regulator or a lawmaker understands that the expertise that industry can bring to the conversation can make the work that they do even better.
Very well said.
Ryan, is there a question I should have asked you today about what's going on in the federal home loan banks, banks and credit unions that I didn't?
We covered a great deal of the beachfront there, Mark
I would just I think the one thing that I would offer to you and to your listeners and readers is if you're not a member of the home loan bank system, check it out. See if it's the right thing for your credit union and If you are a member of the system, get involved.
One of the things I say this as an advocate, and I said it when I was advocating for credit unions, there's no one more invested in the success of the home loan bank system than the home loan bank members and the communities that they serve.
So if something is going to impact the home loan banks, it's going to impact their members as well. And it's important for folks to stay involved. And if folks are interested in getting more information, or maybe they've lost my contact information because I do have friends in the credit union space. I It's I'm pretty easy to find on LinkedIn
I love that. Check it out and get involved, and I will say that NCUA field staff has a very positive feeling about federal home loan banks and are out there encouraging credit unions to have it as part of their toolbox.
So if you don't have a relationship - Ryan said it better than I could - check it out.
Ryan, this has been great. I appreciate your time. I'm sure your days are chocked full these days.
I believe that the listeners are really going to enjoy hearing a little bit of what's going on with the Federal Home Loan Banks and the folks that you represent.
Thanks so much for your time today, Ryan
Hey, thanks for the opportunity, Mark.