WASHINGTON — The Federal Home Loan banks are quietly pressing Senate lawmakers to change a provision in the regulatory reform bill that they say would cripple their core business of lending to banks.
The 12 banks are trying to win an exemption from the bill that would set limits on the amount of money a systemically important institution could lend to a single borrower.
The banks argue that the curb would slash their advances to major institutions across the country, reducing liquidity support for those banks and restricting their lending capacity.
In its current form the bill would "disrupt the Home Loan Bank System and our ability to provide liquidity to our members," said Alfred DelliBovi, president of the Federal Home Loan Bank of New York.
Home Loan bank officials say the effect of the provision appears unintentional and that they are working with Senate Banking Committee Chairman Chris Dodd on an exemption.
At issue is how the bill targets systemically important companies, which could not lend more than 25% of their capital to a single borrower. Exactly which companies are considered systemically important is left up to a proposed interagency council.
What Home Loan banks fear is that the council could eventually designate several of the individual banks, or the entire Home Loan Bank System, as systemically important. In either case, they say, the concentration limit would significantly curtail the banks' advance business to large borrowers.
For example, the Federal Home Loan Bank of San Francisco has five borrowers that would be over the cap: Bank of the West, Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc.
The New York Home Loan Bank has 10 such borrowers, including Hudson City Savings Bank, MetLife Inc. and New York Community Bank in Westbury. According to March 31 data, the New York Home Loan Bank bank had $5.4 billion in capital. A 25% concentration cap would mean it could lend no more than $1.35 billion to any bank. Many of its current advances already far exceed that level.
According to the Home Loan bank's Securities and Exchange Commission filings, Hudson City, of Paramus, N.J., had $17.3 billion worth of outstanding advances as of Sept. 30 at the Home Loan Bank of New York. MetLife held $14.3 billion worth of advances, New York Community Bank held $8.2 billion, M&T Trust Co., $5.5 billion and Prudential Life Insurance Co., $3.5 billion.
For the San Francisco bank, the numbers are even bigger. Citibank had $49 billion of advances outstanding, while JPMorgan Chase had $29.1 billion and Wells Fargo had $16.2 billion on Sept. 30.
What Home Loan bank officials fear is a downward spiral if the concentration caps are put into effect. Member institutions must buy stock according to how much advance business they do with a Home Loan bank, which counts as capital for the bank. If the member institution must reduce its advance borrowings, it can eventually reclaim that stock, thus lowering the Home Loan bank's capital level.
The lower the capital level drops, the lower the concentration cap, which is tied to that figure. "It's a race to the bottom: a spiraling downturn," DelliBovi said. "The next time, that guy will have to give up more advances, and then the capital number is lower. At some point you will have a Home Loan bank that is not viable."
Home Loan bank officials said it is not fair to cap their lending when advances are risk-free for the bank and have never produced a loss. They also say it will hurt their ability to inject liquidity into the system — the real purpose of the system and a role that was vital during the financial crisis.
John von Seggern, the president and chief executive officer of the Council of Federal Home Loan Banks, said the 12 banks were the source of more than $300 billion in liquidity during 2008.
"We couldn't have done that if we had this restriction," von Seggern said. "The entire financial system in the country would have been really badly hurt if we couldn't have put the liquidity into the market at that time."
The Home Loan banks are being joined by the Independent Community Bankers of America, which argues the banks should not be considered systemically important as a group or individually.
"I would find it hard that the systemic-risk council would declare them systemically important, but nevertheless we don't want any suggestion in the bill that they could be," said Cam Fine, the ICBA's president.
Though the House has already exempted the Home Loan banks from the concentration limit, it is unclear whether the Senate will follow suit. The banks are also seeking an exemption from their debt being covered under the so-called Volcker Rule, which would ban proprietary trading. (The bill already exempts the debt of Fannie Mae and Freddie Mac.)
But DelliBovi said he was optimistic that lawmakers will ensure the Home Loan Bank System is not harmed by the legislation.
"There has been a lot of work done on it and there's been a tremendous amount of support for the system," he said.
