The 12 Federal Home Loan Banks have voluntarily agreed to rebuild their retained earnings now that their 20-year obligation of making interest payments on $300 billion of Resolution Funding Corp. bonds ends later this year.
The government bonds were issued by the Treasury Department to cover some of the costs of the savings and loan bailout of the late 1980s.
The 12 FHLBs made $727 million in payments on the REFCORP bonds in 2010 alone.
With that commitment ending, the 12 FHLBs want to use those funds to strengthen capital reserves, according to John von Seggern, president and chief executive of the Council of Federal Home Loan Banks.
"The System Capital Initiative calls for each Federal Home Loan Bank to reserve 20% of its earnings in a restricted retained earnings account," von Seggern said. (This 20% reserving requirement is equal to the bank's current REFCORP assessment.)
Over time, each FHLB is supposed to accumulate retained earnings equal to 1% of their consolidated debt obligations. At the end of last year, the 12 banks combined had $801 billion in consolidated obligations outstanding.
FHFA acting director Edward DeMarco first suggested the idea of rebuilding retained earnings last fall during congressional testimony.
He noted that retained earnings are a key component of capital but the FHLBs have not been able to maintain adequate levels because of the REFCORP obligation.
As of September 30, the 12 FHLBs had a combined capital ratio of 6.4% — but only 2.2% of capital consisted of retained earnings. The remaining 97.8% in capital is stock purchased by member banks, thrifts, credit unions and life insurance companies.
