FHLB Directors Oppose Proposal

The directors of the Federal Home Loan Bank of Cincinnati staged an early attack on a proposed capital rule and it looks as if other FHLBanks will be joining and demanding that federal regulators withdraw the rule or make significant changes.

In filing an early comment letter, the board of directors of the Cincinnati FHLBank claim the Federal Housing Finance Board's capital proposal would be "harmful" to their bank and force it to repurchase $400 million of excess stock and increase its retained earning by over $100 million.

"We believe the end result of the proposed rule for the Cincinnati bank will be lower capital levels, lower liquidity and lower profitability," FHLBank chairman Charles Koch says in the comment letter. The Cincinnati directors also point out the proposed rule would overturn its capital plan that the Finance Board approved back in 2002 and "destroy our current business model."

The proposed capital rule is "unnecessary" and it could undermine the financial strength of the Cincinnati bank and FHLBank System, according to the April 28 comment letter.

Along with the comment letter, the directors filed a legal opinion by the Cincinnati law firm Taft, Stettinius & Hollister LLP, which asserts the Finance Board's capital changes are inconsistent with the 1999 Gramm-Leach-Bliley Act.

"Through the proposed rule, the Finance Board appears to be trying to re-address and amend the GLB Act's very clear capital requirements. When statutory requirements are clear, however, the Finance Board has very little power to alter them by regulations or rulings," the opinion says.

The proposed rule would require the 12 FHLBanks to increase their retained earning and limit their excess stock to 1% of a bank's total assets. FHFB chairman Ronald Rosenfeld contends the changes are necessary to ensure the problems at Chicago and Seattle FHLBanks, which are currently operating under supervisor agreements, do not crop up at other banks.

Critics claim the Finance Board can address such problems through supervision and it does not need a "one-size-fits-all" regulation.

The Finance Board approved the proposed rule by a 5-0 vote in March and issued it for public comments. The comment period ended July 13. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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