The 12 Federal Home Loan Banks are getting closer to paying off their REFCORP obligations and their regulator wants them to use that extra money to rebuild retained earnings.
The banks paid $154 million in the third quarter toward the interest payments on $300 billion of Resolution Funding Corp. bonds that Treasury issued to cover some of the costs of the S&L bailout in the late 1980s.
The REFCORP payments, which consume 20% of each bank's net earnings, are scheduled to end in January 2012.
"When the REFCORP obligation is satisfied, the Federal Housing Finance Agency will expect the FHLBanks to allocate a commensurate sum each quarter to retained earnings," the GSE regulator says in its annual performance report to Congress.
FHFA acting director Edward DeMarco first suggested the idea in September during congressional testimony.
He noted that retained earnings are a key component of capital but the FHLBanks have not been able to maintain adequate levels because of the 20-year REFCORP obligation.
As of September 30, the FHLBs, combined, had $900 billion in assets and a 6.4% capital ratio. But only 2.2% of capital consists of retained earnings, and 97.8% is in the form of capital stock.
Council of FHLBanks president and chief executive John von Seggern said rebuilding retained earnings is probably "step one" in getting all the FHLBs' balance sheets in order. "We think it is a very logical plan and something we would be very supportive of," he said.
All of the 12 FHLBanks were profitable in the third quarter. Two reported losses in the second quarter.
"The FHLBanks like the rest of the financial system went through the ultimate stress test over the last two or three years. And we came through that stress test fine," von Seggern told National Mortgage News.
