Proposed regulations for the Federal Home Loan Bank System could have some unintended negative effects on the banks and their members, bank and thrift trade groups cautioned in comments to the Federal Housing Finance Board.
The FHLBanks could see their safety and soundness "adversely affected" by portions of the proposed regulations, warned the Savings and Community Bankers of America. The Independent Bankers Association of America said its members could also be hurt by some of the provisions.
One of the biggest changes would allow the district banks more flexibility in setting fees - an idea that many analysts like in concept but worry about in practice. The banks would be able to scrap their existing fee schedule and would instead set rates based on internal costs as well as the risk posed by potential customers.
"SCBA would support elimination of the current requirement that advances be priced within a prescribed schedule of markups over the cost of issuing consolidated obligations." SCBA President Paul A. Schosberg said in a Nov. 30 letter.
But "written policies on advances pricing procedures should be required for each FHLBank, with periodic review," Schosberg warned. He said he is concerned about "the inherently adversarial nature of this credit assessment and pricing process, plus the need to ensure that artificially low-rate advances are not used to attract members or to deflate earnings" to lessen required payments to help fund the thrift bailout.
Schosberg praised much of the proposal but warned of hardships to thrifts if certain provisions are not handled carefully. For example, one section of the proposed rule would give the district banks the right to force members to sell back stock on 15 days' notice.
"Some members hold significant positions in FHKBank stock." Schosberg said. "Forcing an institution to restructure a portion of its portfolio could disrupt its business plan and economic performance."
Commercial lenders, which are just learning about the advantages of using the FHLB System, have also questioned some aspects of the regulations.
"We ... believe that the system should provide equal access to commercial banks that demonstrate the requisite commitnent to housing finance which the FHLB system was designed to encourage," Robert W. Hawkins, president of the Independent Bankers Association of America, said in a Nov. 27 letter.
Commercial bankers have had access to the FHLB system since the 1989 passage of the Financial Institutions Reform, Recovery and Enforcement Act.
"Over 1,000 commercial banks are now members of the system, almost half of which are IBAA members," Hawkins said.
One of the provisions in the proposal that concerns the IBAA could give credit unions and insurance companies a competitive advantage in getting advances. This section of the proposed rule would prohibit loans to members that do not have positive tangible capital unless the member gets a waiver from its primary federal regulator.
"The proposal defines tangible capital as (Generally Accepted Accounting Principles) capital less intangibles," Hawkins noted. But he argued that the finance board must "ensure that the definition of tangible capital as applied to credit unions and insurance company members by the FHLBanks is no more liberal than the definition as applied to commercial banks and savings institutions."