Magazine article American Banker

Finance Board Wants More Profit Retention: A Proposal Designed to Scuttle Mortgage Purchases by FHLBs?

Magazine article American Banker

Finance Board Wants More Profit Retention: A Proposal Designed to Scuttle Mortgage Purchases by FHLBs?

Article excerpt

WASHINGTON -- The 12 Federal Home Loan banks would have to hold significantly more in retained earnings under a proposal the Federal Housing Finance Board issued Wednesday.

The proposal would restrict the amount of excess stock a Home Loan bank could hold and require each one to hold at least $50 million plus 1% of nonadvance assets in retained earnings.

Under the plan, the Home Loan Banks would have to hold approximately $4.4 billion in retained earnings -- a 76% increase from the level at yearend.

It would especially affect those banks with large concentrations in mortgage assets and other nonadvance investments such as mortgage-backed securities.

For example, the proposal would force the Home Loan Bank of San Francisco to increase its retained earnings by more than $500 million, to $630 million. The Home Loan Bank of Chicago would have to raise its retained earnings by $80 million, to $600 million.

The proposal, which the Finance Board approved unanimously but has not yet released to the public, is already generating opposition.

Robert Davis, the executive vice president of America's Community Bankers, said his trade group is concerned the proposal would raise "retained earnings to an excessive level."

He said the plan was the result of a mistake the board made several years ago when it let the banks begin purchasing mortgages from their members without also raising capital requirements.

"This proposal is in part a response to the Finance Board's mistake of ... allowing Home Loan banks to buy mortgages without a capital requirement," he said.

John von Seggern, the president of the Council of Federal Home Loan Banks, said he was "concerned" about the proposal, but would not discuss it further, because it was not publicly available.

A spokeswoman for the San Francisco bank said it was studying the proposal and would submit comments on it. …

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