The Federal Home Loan Banks of Chicago and Dallas announced on Wednesday that they have begun preliminary talks about a possible merger as both banks face challenges turning a profit.

Our focus is on identifying whether and how a combination would produce advantageous results and improved value for members of both organizations and the affordable housing needs of their communities, said Terry Smith, president and CEO of Dallas, and Mike Thomas, president and CEO of Chicago.

The Federal Home Loan banks are government-sponsored enterprises that use private capital to finance U.S. housing and community development. The regional banks are held cooperatively by more than 8,000 lending institutions and enjoy a favored position in the capital markets because of their implied government backing.

In recent years, increased regulatory scrutiny and consolidation has squeezed Home Loan bank profits. In May 2006, for instance, the Dallas bank faced the loss of its largest member to a merger with Wachovia. The Chicago bank was forced to take costly remediation steps recently after a failed home loan program.

Ronald Rosenfeld, chairman of the regulatory Federal Housing Finance Board, had no comment Wednesday about the merger talks but has in the past supported the idea that some of the twelve regional banks could merge.

Quite frankly, I'm not sure why you need six banks between Pittsburg and Topeka, Rosenfeld told a Congressional panel in September.