Capital rules applying to the Federal Home Loan Banks will be divided into four classifications under an interim final rule the Federal Housing Finance Agency (FHFA) issued Tuesday.
The proposal was released at a critical time for some of the 12 Home Loan banks, which are struggling under mortgage-related charges that have eroded capital levels. The Home Loan banks in Pittsburgh and Seattle have already warned they may slip below required minimums.
Currently, Home Loan banks are judged to be adequately capitalized if they have more than 4% of their total assets as capital. That will not change under the new rule, but the FHFA is adding more layers. Home Loan banks will be considered "undercapitalized" if their cushion is between 3% and 4% of assets, "significantly undercapitalized" if it is between 2% and 3%, and "critically undercapitalized" if it is less than 2%.
The rule, required by a law Congress enacted in July, and will replace the existing minimum capital rule. The change does nothing to a separate risk-based capital requirement that the Home Loan banks also face. Some Home Loan banks have expressed frustration with the intricacy of that rule, which requires a calculation of credit, interest rate and operational risk before determining the ultimate risk-based target.
Lawmakers mandated the four classifications but left it to the FHFA to determine the threshold for each.
Under Tuesday's rule, the procedures for undercapitalized banks will remain much the way they are today: The bank would have to develop a capital restoration plan and could not pay dividends or repurchase stock.
Significantly undercapitalized banks would follow the same procedures but would also be barred from paying any director or executive officer a bonus. The banks would also be prohibited from paying an executive more than their average salary during the 12 previous months before the institution ran into trouble.
The FHFA could put critically undercapitalized Home Loan banks into conservatorship or receivership. A receivership would be mandatory only in instances in which the bank has not been paying its debts or its assets are found to be less than its obligations for 60 days.
The rule, which is open to comment for 90 days, sought input on whether an additional "well capitalized" classification "would be a useful and appropriate way to encourage banks to hold more than the minimum amounts of capital."
The agency also said, "Having a well-capitalized rating may provide advantages to the bank in its dealings with counterparties."
If the Home Loan banks were required to write off their entire portfolio of private-label mortgage-backed securities, only four - the Dallas, New York, Cincinnati, and Des Moines banks - would still be considered adequately capitalized, according to a report Moody's Investors Service issued this month.
The Atlanta, Boston, Pittsburgh, Topeka, Chicago, and Indianapolis banks would be undercapitalized, according to Moody's. The Seattle and San Francisco banks would be significantly undercapitalized. No Home Loan bank would be at risk of being termed critically undercapitalized.
(The Home Loan Bank of Chicago remains subject to a 4.5% minimum capital ratio established by the Federal Housing Finance Board last year, before that agency was merged into what became the FHFA.)
Implementing a separate provision of last summer's housing law, the FHFA codified prompt corrective action procedures for the Home Loan banks. The agency already has such powers over Fannie Mae and Freddie Mac.
The FHFA largely punted on the question of capital requirements for Fannie and Freddie, presumably to let the Obama administration and Congress decide how the government-sponsored enterprises should emerge from conservatorship.
The capital rule the agency released Tuesday for the two GSEs was identical to provisions Fannie and Freddie already agreed to follow as part of the government's Sept. 7 takeover.
Under the rule, each GSE could increase its mortgage portfolio to $850 billion by yearend, but starting at the end of next year, they must slash their holdings until they reach $250 billion.
"While many - including, for example, then-Secretary of the Treasury Henry Paulson - have suggested major changes in the structure or roles of the enterprises, until Congress acts to make changes to their charters, FHFA must implement current law in the best way possible," the agency said.
When Congress was debating the housing legislation last summer, capital requirements for the Home Loan banks were largely a back-burner issue. As the financial markets crumbled, lawmakers were far more focused on shoring up Fannie and Freddie and putting the Home Loan banks under the same regulatory structure.
That has changed in recent months as the declining value of private-label mortgage-backed securities has led to other-than-temporary impairment charges at many Home Loan banks. The Atlanta, Chicago, and Pittsburgh banks posted $209 million of such charges for the third quarter.
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