US regulator says it plans to overhaul Federal Home Loan Bank system

WASHINGTON, Nov 7 (Reuters) - The U.S. regulator charged with overseeing the Federal Home Loan Banks said in a report on Tuesday the system is overdue for an overhaul in its mission and structure.

The Federal Housing Finance Agency emphasized in the report that there needs to be a clearer distinction between the purpose of the FHL banks and the Federal Reserve, which is the primary emergency lender for banks. The agency said FHL banks were created by Congress in 1932 to provide liquidity to banks for affordable housing and other economic development.

Tuesday's report was the culmination of a year-long project by the agency to review the FHL banks. It indicated that the FHL banks had shifted from that original mission over the years, and the system had not been updated to meet current realities.

"For complex and varied reasons, there has been a decreased focus on housing-related activities by many institutions that are members of the FHLBank System," the report stated. "These changes, taken together, highlight the need for (agency) to clarify the mission of the System so the FHLBanks are held accountable for serving their public purpose."

FHL Banks are 11 regional government-chartered institutions that raise money for low-cost lending to their members. They are a vital source of funding to regional banks, and had morphed over the years into a preferred final stop for cash before banks in need turn to the Federal Reserve itself as a last resort.

As part of its recommendations, the agency said it would seek to refocus on the housing mission by proposing most banks be required to hold at least 10% of their assets in residential mortgages to retain access to FHL Banks.

The agency also suggested it could consolidate the number of FHL banks in the system, noting it could shrink the numbers of banks to as little as eight without additional authority from Congress.

In response to Tuesday's report, the head of the FHL bank system said any overhaul would be part of a long process, and the firms would be focused on ensuring they can continue to serve members.

"The overwhelming sentiment from (agency's) review was that stakeholders want more, not less, from the FHLBank system," said Ryan Donovan, head of the Council of Federal Home Loan Banks. (Reporting by Pete Schroeder; Editing by Aurora Ellis)