WASHINGTON — The Federal Home Loan banks announced a plan Tuesday to use future earnings to boost capital after they finish paying off bonds stemming from the savings and loan crisis.
Under a 1989 law, the banks had to pay a portion of their earnings every year to the Resolution Funding Corp. to service those bonds. The banks initially agreed to pay $300 million annually for 40 years, but a statutory change in 1999 changed that formula to dedicate 20% of their net earnings. Because that totaled much more than $300 million a year, the banks will be able to finish paying by the end of the year.
Under Tuesday's plan, once the bonds are retired, those funds will be redirected into special retained earnings accounts at each Home Loan bank. That effectively pledges at least 20% of their future earnings to bolstering their capital position.
"It's not often that institutions volunteer to build more capital," said Al DelliBovi, the president of the Federal Home Loan Bank of New York. "The bottom line is it's a positive example of financial institutions focusing on capital and it strengthens the position of the Home Loan banks."
The banks have been working on the agreement for three years as it became increasingly clear they were going to pay the Refcorp bonds roughly 19 years ahead of schedule. At the same time, the banks have been criticized by their regulator for failing to hold enough retained earnings to withstand potential losses.
Under the agreement, the banks would set aside 20% of their net income into a restricted retained earnings fund that could only be used to absorb losses, and could not be tapped to pay dividends. The agreement says that fund should eventually equal 1% of a Home Loan bank's outstanding consolidated obligations for the previous quarter.
In a statement, the Federal Housing Finance Agency welcomed the agreement.
"FHFA is pleased that the 12 Federal Home Loan banks have jointly and voluntarily agreed to build their retained earnings," the agency said. "FHFA looks forward to reviewing the capital plan amendments the FHLBanks will submit for agency approval. The FHLBanks' plan is consistent with the framework in Acting Director [Edward] DeMarco's testimony last September, which called for the FHLBanks to accelerate the growth rate of retained earnings upon satisfaction of their Refcorp obligation."
The agreement could also help the banks politically as Congress begins debate on the creation of a new housing finance system. The banks have argued that they should largely be left alone, contending they performed well during the financial crisis by helping to provide liquidity to their members. Although some critics have concerns about their overall declining level of advances, the banks' core business, a pledge to build extra capital might help convince lawmakers the system does not need to be overhauled.
"This is a very prudent thing to do," said John von Seggern, the president of the Council of Federal Home Loan Banks. "We are going to put this not only into retained earnings, but in a restricted fund so that not only is each Home Loan bank stronger, but the entire system is stronger."
DelliBovi agreed. "We performed well in this crisis and this will make sure we can continue to perform well in any crisis that may come at us," he said.
