SEARCH

SEARCH BY CITATION

Congress established the Federal Home Loan Banks (FHLBs) in 1932 to pursue the public purpose of homeownership. Recently, three views of their mission have emerged; one is that their purpose is to help small banks to remain viable. Why did their mission expand in this direction? We argue that mission expansion is a process that is better understood in terms of behavioral choice than public choice. Change began when expert attention was directed to small banks in rural areas and officials innovated within the existing rules to address their needs. Recognizing the FHLBs' usefulness, community bankers sought a more fundamental change in their practice. Responding to the general interest in preserving small banks' viability, legislative entrepreneurs advanced permissive rule changes. These were implemented to different extents in individual FHLBs in response to local needs. The case illustrates the usefulness of the behavioral-choice paradigm for understanding change in public agencies and suggests legitimacy for mission change and the value of maintaining publicly directed administrative capacity.