Efforts to reform Federal Home Loan Bank investment policies are running into opposition from community banks.

The Federal Housing Finance Board wants to limit the amount of capital that commercial banks and thrifts may keep in the system, arguing this would force Home Loan banks to reduce their nonhousing investments.

But bankers blasted the plan.

"The board's proposal is another attempt by the government to fix something that is not broken," wrote Robert A. Panzer, senior vice president of State Bank of Table Rock in Pawnee City, Neb.

"It is high time that the Federal Housing Finance Board remove itself from micromanagement of the Federal Home Loan banks," wrote C.R. Bryant Jr., the president of Rio Grande Savings and Loan Association in Monte Vista, Colo.

The Home Loan banks hold $137 billion in investments, an amount that has sparked criticism from the Treasury Department and others that the system has strayed from its original mission of providing liquidity to small banks to fund mortgages.

Finance Board Chairman Bruce A. Morrison agrees that the investment portfolio should be scaled back, and has said Home Loan banks would be less inclined to invest in nonhousing securities if banks and thrifts did not store excess capital in the system.

To reduce capital, the Finance Board issued an advanced notice in April of a proposed rule change that would bar commercial banks and thrifts from investing more in Home Loan banks than the amount required.

According to the Finance Board, the 12 Home Loan banks have total capital stock of $22.8 billion. That is $2.8 billion, or 12.6%, more than is required by law.

Banks often acquire excess stock because Home Loan banks pay some dividends in stock. These dividends are tax-free until redeemed. The Finance Board also proposed requiring that all dividends be paid in cash.

There were 68 letters filed by the May 6 deadline, nearly all from community banks opposed to the changes. These banks said there are many advantages to holding excess capital in the system.

For instance, banks that keep excess capital are allowed to borrow more. That could be important if interest rates rise, wrote Gilbert G. Lundstrom, president and chief executive officer of First Federal Lincoln (Neb.) Bank. Rather than paying consumers more for deposits, banks could borrow more from the Home Loan Bank System, he said.

Home Loan banks also need the excess capital to fund new housing programs and pay their share of the thrift bailout tab, several bankers wrote.

Several Home Loan banks also opposed the plan, saying it could discourage commercial banks and thrifts from using the system. "The frequent mandatory redemptions of excess capital would act as a disincentive for members to borrow," wrote Tony Scallon, the chairman of the Home Loan Bank of Des Moines.

"The board sees this as a step backward in achieving the Finance Board's announced goal of devolving additional authority to the local boards of directors," wrote Nancy C. Miller-Herron, the chairwoman of the Federal Home Loan of Cincinnati.

America's Community Bankers urged the Finance Board to delay action until Congress completes its work on financial reform legislation, which includes some provisions affecting the Home Loan bank system.

An agency spokesman would not comment on the objections and said the Finance Board has no timetable for issuing a formal proposal.

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