Despite warning this month that the Federal Home Loan Bank of Seattle's capital is likely to fall below required minimums, its president, Richard Riccobono, has no immediate plans to raise more.

"If we take in more capital than we need to support our business and risk profile, we have to leverage it and invest it," Riccobono said in an interview last week. "Given the rules that apply to Federal Home Loan banks, we are limited primarily to investing in mortgage-related assets."

Those are precisely the holdings whose plummeting market values have suddenly caused headaches across the Federal Home Loan Bank System. The prospect of losses in private-label portfolios prompted the Atlanta, Chicago, and Seattle banks to report $209 million of other-than-temporary impairment charges for the third quarter.

As a result, Riccobono told his bank's members in a Jan. 12 letter that its Dec. 31 risk-based capital ratio would likely fall below the required minimum. That would force the bank to suspend stock repurchases and dividends to members.

Riccobono, echoing the sentiment of others in the system, is adamant in saying that the capital measurements are faulty, because they focus on a security's market value at a time when there are few buyers. He said the portfolio's credit risk is in good shape.

"We believe we have enough capital to cover the credit risk associated with our MBS investments," he said.

Whether the bank has enough capital to cover all potential charges imposed by accountants is an open question. As of Sept. 30 it held $3.03 billion of total capital, including $162.3 million of retained earnings.

That cushion could be depleted if accountants take a hard line on its mortgage investments. Under mark-to-market accounting rules, a Home Loan bank must project whether it expects a loss on the private-label mortgage-backed securities it plans to hold to maturity. It considers whether the mortgage has lost more than 60% of its value or has been downgraded below investment grade, as well as whether the mortgage is being supported by credit enhancements. The projected losses prompt a mandatory other-than-temporary impairment charge.

According to Moody's Investors Service, the 12 Home Loan banks are facing unrealized losses of $13.5 billion related to private-label mortgage-backed securities. The agency also estimated actual losses at less than $1 billion in a Jan. 8 report.

"Mark-to-market accounting is applicable in a lot of places," Riccobono said. "But applying those rules in today's abnormal market does not really give an accurate picture of the economic value of these assets — and that's hardly transparency."

A spokeswoman for the Federal Housing Finance Agency (FHFA) confirmed Friday that it expects to update its capital rules for Home Loan banks early this week. How the rule, which is required under legislation Congress approved last summer, will affect capital levels is unclear.

Riccobono said he is already frustrated by the Finance Agency's current capital rules, which effectively moved the goalpost for his bank by requiring it to hold more capital to account for interest rate risk. He argues that his mortgage holdings pose little rate risk.

"The majority of our private-label MBS are floating-rate instruments," he said.

Riccobono also said he has communicated his concerns to the FHFA, but he did not sound hopeful that changes are imminent.

"Does any regulator want to go out there and reduce anybody's capital requirement in these economic times?" he asked. "No."

The Seattle bank lost $18.8 million in the third quarter and will report its fourth-quarter results in March. Its advances outstanding grew 11.8% from a year earlier, to $46.3 billion on Sept. 30. Gauging membership trends is tough, because the bank has not updated those figures since December 2007, when it had 380 members.

Riccobono rejected some of the more extreme options open to Home Loan banks with capital shortfalls. He said he would not follow the lead of the Pittsburgh Home Loan bank, which warned Jan. 16 that its capital level may fall below regulatory requirements, and that it might require members to ante up more capital.

He also dismissed the need for Home Loan banks to apply for funds from the Troubled Asset Relief Program (TARP). The banks do not need to do so because they are self-capitalizing, he said, since they require collateral for advances.

"At this point, in my view, Tarp money should not be made available to Federal Home Loan banks," Riccobono said. "Again, we aren't looking for additional capital to leverage and invest."

However, he also said that if the Treasury Department started using TARP for its original purpose — to purchase troubled assets — it could establish a market for private-label mortgage-backed securities, which would help the Home Loan banks.

"That would go a long way toward increasing confidence in the market and establishing some pricing that would reflect the economic value of those assets," he said.
Riccobono's strategy: Ride out the storm until the market acknowledges the value of mortgage assets.

"As market values come back," he said, "we could be in compliance with our risk-based capital requirement in fairly short order."

Since the Federal Reserve Board is increasingly open to low-cost lending against a diverse range of collateral through the discount window, Riccobono acknowledged that the Home Loan banks are no longer the only game in town for financial institutions seeking funding.

"The truth is our members do have other funding options right now," he said. "But for the vast majority of our members, we are the No. 1 choice for liquidity and funding."

Though the Home Loan banks are facing their biggest challenges in decades, Riccobono said he remains confident in both his management team and his bank's financial footing.

"You can only consider these things on the circumstances that exist today," he said. "You can't predict the future. As of today, I'm telling you we have the appropriate amount of capital commensurate with the risk profile of the bank."

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