The top regulator of the Federal Housing Finance Agency said Wednesday he won't rush the 12-bank cooperative to correct their balance sheets, but does expect some alteration soon.
Investments at four out of the 12 banks of the Federal Home Loan banks — Chicago, Seattle, Cincinnati and Indianapolis — now exceed their advance business, and two others — Boston and Topeka — are close to joining them.
DeMarco has raised the issue a number of times — even as recent as last week, but he made it a point to mention it again during a speech to the Exchequer Club, warning the imbalance may be taking the Home Loan banks away from their core mission of advances.
"The combination of a substantial decline in advances and investment losses have caused some Federal Home Loan Bank balance sheets to get out of kilter with a heavier reliance on investments that is inappropriate in the long run," DeMarco said.
Still, despite the warning, he did not put a hard deadline on when he expected the banks to get their balance sheets back in order.
"I expect to see this corrected over time," he said.
The challenge facing the banks, he said, is continued shrinking advances combined with the stock that's been invested by members that needs to be deployed.
"It takes time to make these adjustments," said DeMarco after the speech in a brief interview with American Banker. "I am mindful how market conditions and the shrinkage of advances make it more of a challenge."
To him, the most important message to the banks is to know on a "long-term basis this is not sustainable."
"What I am doing is letting the banks know we're watching this, and we think they should be watching as well," said DeMarco. "I believe that they are, and that they hear me."