State regulators are concerned that community banks that rely heavily on Federal Home Loan banks for liquidity may not have enough collateral at yearend to meet year-2000-prompted withdrawals.

Without proper planning, small banks pledging the bulk of their mortgages as collateral for advances from Home Loan banks may not have enough loans to get cash advances late in the year.

"It's a collateral management issue," said Ellen Lamb, senior vice president of communications for the Conference of State Bank Supervisors.

State regulators are focusing their concern on smaller institutions and those that are new to Home Loan bank borrowing, Ms. Lamb said.

According to a new survey, 26% of the community banks polled said they would need as much as 20% more cash at yearend to meet the demand of depositors who are skittish about the year-2000 computer issue. About 57% percent of the banks said they would need 6% to 20% more cash.

The poll, by Grant Thornton LLP, indicates that 43% of the banks plan to increase their borrowings from a Federal Home Loan bank this year.

Small banks that are primarily mortgage lenders are most vulnerable, Ms. Lamb said, because the bulk of their assets could be pledged to a Home Loan bank.

John L. von Seggren, executive vice president of the Council of Federal Home Loan Banks, is aware of the growing regulatory concern, but he predicted that problems will be isolated. Banks have pledged only 20% of the $1 trillion in available collateral to the System, he said, noting, "This is not a systemwide problem."

Lee Swanson, a community banker who sits on the board of the Federal Home Loan Bank of Chicago, agreed. Mr. Swanson, president and chief executive officer of State Bank of Cross Plains in Wisconsin, said his bank has already calculated how it will collateralize a yearend cash advance from the Federal Reserve as part of its year-2000 compliance plan.

The $190 million-asset bank has an in-house liquidity policy not to pledge more than 50% of its mortgage collateral to a Home Loan bank, he said.

Mr. von Seggren said bank regulators are not as comfortable with Home Loan bank advances as thrift regulators, whose charges have been taking advances from the System for decades.

In fact, the Federal Reserve Bank of St. Louis is conducting a study of the risks associated with banks' Home Loan bank advances. It is due out later this year.

In the meantime, Ms. Lamb urged caution. "This is a relatively new phenomenon, , especially for smaller institutions," she said. "We're looking for things to worry about."

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