The chief regulator of all GSEs this week told directors of the 12 Federal Home Loan Banks (FHLBs) that they need to keep an eye on the system’s investment portfolios and executive compensation packages.

Acting Federal Housing Finance Agency (FHFA) director Edward DeMarco noted that investments have been the major source of financial problems for the FHLBs over the past 20 years.

"Large investment portfolios intended to generate earnings are inconsistent with the purposes of the FHLBank system and is a misuse of the system's preferential access to capital markets," DeMarco said Wednesday at an annual FHLB directors' conference.

FHLBs that stuck to their traditional advance business of making loans to member banks, thrifts and insurance companies are among the "best performing" in the system, he said.

The FHFA director also said his agency is stepping up its reviews of executive compensation packages.

FHLBs are a "simpler, or less complex, entity than a similar-size commercial bank," DeMarco said.

"As board members, you have a responsibility to develop executive compensation packages that are appropriate and comparable to other similar-sized institutions…," he added.

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