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Value any HomeHome-Loan Bank Merger Talks
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The talks could spur a consolidation among the 12 regional home-loan banks, cooperatives that lend money to commercial banks and thrifts. The idea of merging some of them has been viewed as a way to increase efficiency, but such undertakings might run into opposition from politicians eager to preserve jobs in their districts.
Because they are government-sponsored cooperatives, the home-loan banks don't have publicly traded stock, and their market value is unclear.
In an interview, Mike Thomas, chief executive officer of the Chicago bank, and Terry Smith, his Dallas counterpart, cited consolidation in the financial-services industry, a rise in costs and opportunities for greater efficiency.
-----------They said the talks were initiated by the two banks, not by their regulator, the Federal Housing Finance Board, which would have to approve any merger. Earnings at the Chicago bank have fallen in recent years, in part due to shrinkage of a mortgage-investment program and to increased funding costs.
A spokesman for the regulator declined to comment. Ronald Rosenfeld, chairman of the finance board, has spoken favorably about the possibility of consolidations. He couldn't be reached for comment.
Congress created the home-loan banks in 1932 to shore up thrift institutions devastated by the Great Depression. Because they were set up by Congress and are federally regulated, investors assume the government would feel obliged to bail out the home-loan banks in a crisis. As a result, they can borrow nearly as cheaply as the U.S. Treasury on international bond markets. They use the proceeds to make low-cost loans, known as "advances," to their 8,100 owners, who are known as members and include commercial banks, thrifts, credit unions and insurance companies.
The advances are a vital source of funding for many local banks that lack the scale to borrow on the international market. The availability of this low-cost funding is one reason the U.S. has more than 8,600 banks and thrifts, despite competition from national giants such as Bank of America Corp. and Citigroup Inc., said Bert Ely, a banking consultant in Alexandria, Va.
Supporters of the home-loan banks fear they may lose business because some big institutions, including Washington Mutual Inc., have begun raising funds through so-called covered bonds, a type of mortgage-backed security popular in Europe. Covered bonds are considered an alternative to advances from the home-loan banks.
Some of the home-loan banks were established in what seem like unlikely places -- such as Indianapolis and Topeka, Kan. -- that aren't major financial centers. Politicians in such areas would be likely to oppose consolidation that would eliminate local jobs.
Write to James R. Hagerty at bob.hagerty@wsj.com
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