The GSE regulator is taking several steps in response to the continued deterioration of Federal Home Loan Bank investments in private-label MBS investments and he is even considering the creation of an insurance fund to prop up undercapitalized banks.

"The Federal Housing Finance Agency in connection with the banks is studying the merits of establishing an insurance fund for the Federal Home Loan Banks," FHFA director James Lockhart said.

The fund would "insure the timely payment of principal and interest on their obligations, facilitate mergers if necessary and provide capital assistance to under-capitalized FHLBanks," he said during a speech at the National Press Club in Washington.

The director noted that FHFA is developing a framework for supervisory decisions on capital distributions and it is closely monitoring conditions at the FHLBanks where impairments on private-label securities (recorded as "other than comprehensive income") exceed retained earnings.

In addition, the agency is issuing a proposal to expand the board of directors of the Office of Finance to include all 12 presidents of the FHLBanks and five independent directors.

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