ACB: Press Releases

Contact:	Robert Schmermund (202) 857-3104 Jim Eberle (202) 857-3145	Jim Eberle (202) 857-3145 (work) (703) 893-2593 (home) [email protected]	For Immediate Release July 12, 2006 #06-40
E-mail: [email protected]

ACB OPPOSES FINANCE BOARD’S PROPOSED CAPITAL RULE, URGES FINANCE BOARD TO REISSUE FOR FURTHER COMMENT

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WASHINGTON, D.C. — America’s Community Bankers asserted its strong opposition today to the Federal Housing Finance Board’s proposed capital rule for the Federal Home Loan Banks as contrary to law and fatally flawed, and urged its withdrawal.

“ACB has serious concerns about the proposal and believes that the rule, if adopted as currently proposed, could have significant negative consequences for the FHLBanks, their member institutions and the communities they serve,” ACB said in its comment letter.

“We believe that this rule has a great potential to fundamentally alter the direction and makeup of the FHLBank System for many years to come, and limit the FHLBank System’s ability to adapt to future financial challenges and demands.”

ACB renewed its request that the Finance Board withdraw the proposal and issue an advance notice of proposed rulemaking to address the numerous issues raised by the proposal.

The proposal would limit a FHLBank’s excess stock to 1 percent of total assets; prohibit the payment of dividends in stock; and require minimum retained earnings in the amount of $50 million plus 1 percent of non-advance assets.

ACB said it opposed limits on excess stock because it would diminish the value of the stock as a stable source of permanent capital; require quick liquidation of assets or substitution of inferior forms of capital; and cause serious tax consequences for many member institutions.

ACB opposed the prohibition on paying stock dividends because such stock creates the most stable form of member stock, is subject to a five-year redemption notice and is the last stock a member would redeem because it would trigger a tax event. “Stock dividends have for several decades enhanced the stability of FHLBank System capital, while providing member institutions a valuable tax savings,” ACB said.

In response to a request for comments on an alternative proposed by the FHFB, ACB said it would not be meaningful or realistic to allow stock dividends to be paid only when a FHLBank is in compliance with the excess stock restrictions.

ACB said that while it agreed retained earnings are an essential component of capital for the FHLBanks, it strongly opposes the particular restrictions on retained earnings and the payment of dividends. ACB disagreed with the proposal’s primary policy rationale that only retained earnings can provide a cushion against the risk of capital stock impairment, treating Class B stock as something other than permanent capital, contrary to the Gramm-Leach-Bliley Act.

The proposal, ACB said, would also diminish an individual owner’s equity in the Bank System by transferring a substantial amount of the Bank’s earnings to the retained earnings account, and hinder the FHLBanks’ ability to manage liquidity.

The dividend payment restriction would result, ACB said, in increasing the cost of advances and other FHLBank services over the intermediate term, and possibly with long-term adverse consequences. The restriction would cause large members with funding choices to reduce their use of the FHLBank System, which will reduce the earnings and increase costs of the FHLBanks.

“The reduction in dividend income and the increase in costs of FHLBank services will have a disproportionately greater impact on small member institutions,” ACB said.

ACB also noted that the proposal is inconsistent with the express provisions of the Federal Home Loan Bank Act and the capital provisions of the Gramm-Leach-Bliley Act.

Click here for comment letter

America’s Community Bankers is the national trade association committed to shaping the future of banking by being the innovative industry leader strengthening the competitive position of community banks. To learn more about ACB, visit www.AmericasCommunityBankers.com.

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