Failure to pay dividends to U.S. banking companies holding Fannie Mae and Freddie Mac preferred stock could hurt the companies' equity capital ratios and force them to reduce lending nationwide by $76 billion to $114 billion, according to the American Bankers Association.
When regulators seized the government-sponsored enterprises this month, they said only a "limited number of smaller institutions" would be impacted. However, in a survey late last week of 8,000 banking companies of varying sizes, the ABA said that roughly a third of the 1,100 respondents said they held GSE preferred stock. Total industry exposure could be between $10 billion and $15 billion, ABA estimated.
In a letter sent Monday to Treasury Secretary Henry Paulson, Federal Reserve Board Chairman Ben Bernanke, and the heads of the other federal banking regulators, Edward Yingling, the ABA's president, warned against eliminating dividends on the GSE holdings. "Otherwise, banks would be restricted in their ability to provide the credit that is desperately needed at this time."
The ABA found nearly 27% of banks surveyed hold preferred GSE stock, and 3.4% hold auction-rate securities backed by GSE preferred stock.
In its letter, the ABA wrote that the government should not reduce payouts on preferred stock until after Sept. 30, permitting Congress and the regulators to assess the implications and address any issues.
(Fannie announced Sept. 10 that it had received the consent of the Federal Housing Finance Agency and the Treasury Department to pay its previously declared dividends on all outstanding preferred stock on Sept. 30, as scheduled. The GSE also said future dividends on common and preferred stock would be eliminated.)
The ABA called for the payment of a reasonable level of dividends, which it wrote would restore a portion of the share value and reduce impairment charges. For tax purposes, losses should be treated as ordinary income and allowed to be offset against a bank's ordinary income, the group wrote. (It recommends that this be authorized in the financial rescue legislation to be considered this week.)
The group also asked that the risk weightings on Fannie and Freddie debt and guaranteed mortgage-backed securities should be reduced from the current 20%, and that the risk weighting of auction-rate preferred securities backed by Fannie and Freddie should be 20%. Finally, it wrote that regulators should increase the flexibility of capital restoration plans for banks that fall below minimum standards.
Dean Debuck, a spokesman for the Office of the Comptroller of the Currency, said the agency could not comment Monday, because it had just received the letter; other regulators were not available for comment.
In a Sept. 11 American Banker article, FDIC Chairman Sheila Bair said community banks would have been worse off if the Treasury Department had not seized the GSEs. "Community banks — which also have significant levels of GSE debt and … [mortgage-backed securities] — would likely have been severely adversely impacted." She said the agencies are working closely with banks to develop plans to "restore their capital and will provide significant latitude within the framework of prompt corrective action regarding the timing and implementation of those plans."