Proposal Targets FHLBank Capital, Dividends

The Federal Housing Finance Board is proposing to increase the retained earnings requirements for the 12 Federal Home Loan Banks and to prohibit the banks from paying dividends in the form of stock.FHLBank representatives expect the proposal, if finalized, to increase an FHLBank's capital requirement by nearly 10% and require the FHLBank System to raise $2 billion in capital. The Finance Board is also clamping down on excess or voluntary stock, which the Chicago FHLBank used to capitalize and build a large portfolio of single-family mortgages. "Excess stock has contributed to inflated balance sheets," Finance Board Chairman Ronald Rosenfeld said. Under the proposal, excess stock would be limited to 1% of assets, and banks would be required to comply within 60 days after the proposal is finalized. Finance Board officials indicated that four FHLBanks currently exceed the proposed 1% limit on excess stock. It is understood that only the New York FHLBank currently meets the proposed retained earnings requirement, which is based on a $50 million minimum, plus 1% of non-advance assets. The capital proposal is being issued for a 120-day comment period.