2nd UPDATE:FHLB Seattle Likely To Breach Capital Requirement
January 13 2009 - 1:05PM
Dow Jones News
The Federal Home Loan Bank of Seattle is likely to breach a
critical regulatory capital requirement due to the deteriorating
value of its investments in mortgage bonds not guaranteed by Fannie
Mae (FNM) and Freddie Mac (FRE), which have been at the heart of
the housing crisis.
The bank, which enjoys the backing of the federal government as
a branch in the FHLB system, said it could report a capital
shortfall as of Dec. 31, 2008, according to a filing with the
Securities and Exchange Commission. It has asked its regulator, the
Federal Housing Finance Agency, to ease the capital
requirement.
Officials at the FHFA declined to comment.
Breach of this level means the bank can't pay out dividends
since it will be forced to conserve capital.
The Seattle bank is part of a regional system of 12 home-loan
banks that is a cousin to housing finance giants Fannie Mae and
Freddie Mac. But unlike Fannie and Freddie, the FHLB branches act
as a prime source of funding for U.S. banks rather than for home
mortgages. Because investors assume the U.S. government would
rescue the home-loan banks in a crisis, the FHLB System can borrow
at favorable terms in global bond markets.
The problem at the Seattle branch centers on its investment
portfolio, which has dedicated $6 billion of its holdings to
riskier mortgage bonds known as private label securities as of
Sept. 30, 2008. The bank reported that the fair value of these
securities was about $4.57 billion as of Sept. 30, 2008. The
depreciation of assets increases the amount of capital the bank
needs to set aside to cover any potential losses.
The FHLB argues, however, that, because these investments will
be held to maturity, potential losses are being overstated by
prices depressed by extraordinary market conditions.
"We believe that the calculation of risk-based capital under the
current rules significantly overstates our market risk in the
current market environment," the bank's Chief Executive Richard
Riccobono said in a letter to member banks filed with the SEC.
Brian Harris, a senior vice president and lead analyst of FHLBs
at Moody's Investors Service, said potential losses to the bank's
investment portfolio are unlikely to pose a substantial risk since
actual losses from these holdings will be minimal if these bonds
are held to maturity.
These pressures, however, aren't unique to the Seattle FHLB,
noted Harris, who expects other branches to feel the squeeze.
Last week, he said in a report that the 12 Federal Home Loan
Banks faced possible write-downs on their $76 billion portfolio of
private-label mortgage bonds. In a worst-case scenario, the total
capital requirement at just four of the FHL Banks would remain
above regulatory minimums, although the ratings agency said that
was unlikely.
He mentioned in the report that the Seattle bank as well as the
Chicago FHLB branch had already posted losses on their mortgage
holdings.
The Seattle bank didn't return phone calls seeking further
comment.
A spokeswoman at FHLB Chicago said the bank hasn't announced any
potential for capital shortfalls, and declined to comment
further.
Michael Ciota, spokesman for the FHLB system, said that "the
FHLBanks are working together to meet the challenges of the current
distressed market and plan on providing enhanced financial
disclosure during first quarter so interested parties can better
assess our current condition."
In its the filing, the Seattle FHLB CEO said the bank holds $2.8
billion in permanent capital, which is sufficient cover risks in
its balance sheet. He also noted that the bank recalculates the
value of its portfolio on a monthly basis so it's possible it could
be compliant with existing regulatory requirements in the
future.
However, an immediate result of the likely shortfall in the risk
capital is that the Seattle bank won't be able to redeem or buy
back any of its outstanding Class A or Class B stock. According to
federal regulations, a Federal Home Loan Bank that fails to meet
any regulatory capital requirement can't declare a dividend or
repurchase stock.
However, the bank already has been in a capital conservation
mode and didn't issue any dividend in the third quarter of last
year, and said it doesn't plan to pay one in the fourth quarter
either.
-By Prabha Natarajan, Dow Jones Newswires; 201-938-5071;
prabha.natarajan@dowjones.com
(Kerry E. Grace contributed to this report.)
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