Des Moines FHLB focuses on members despite political debate

Northwestern Financial Review, Jun 15-Jun 30, 2003 by Bengtson, Tom

Q: SEC registration for Home Loan Banks is a controversial issue. Help our readers understand where the Des Moines bank stands on that.

There is a legal issue, and there is a political issue. The legal issue is that Congress gave the authority to the Federal Housing Finance Board to regulate our capital market access. And they can't delegate it to another agency. Only Congress can do that.

Now let's deal with the political side of it. The spin is that we are afraid of disclosure. In fact, that is furthest from the truth. Our annual disclosure is 157 pages long. Could we improve it? I bet we could. Are we going to improve it? Yeah, and there is absolutely no resistance on that. The only resistance is on the jurisdiction. We have multiple regulators here, including one that Congress didn't designate for us; that is the issue we are fighting because we think it has implications for the business.

We are one of 12 entities regulated by the Federal Housing Finance Board. If we voluntarily go with the securities and Exchange Commission, we become one of 10,000 or 15,000. Right now when we have an issue to resolve, it is resolved in days, with a regulator that only has to deal with us. If we go to the SEC, we are more likely talking weeks or months. And that has real implications on liquidity management. If there is some issue that needs to be resolved, and needs to be disclosed to the marketplace, they could preclude us from issuing debt for a period of time. That means we are going to have to maintain much higher levels of liquidity to support that uncertainty. At the same time, to support that higher level of liquidity, we would probably have to ask our members for more capital. And then you have the implication on their return on investment. We would have much more liquidity on our books and liquidity is usually the lowest-yielding investment.

Isn't this really something the Administration and Treasury has to work out with Congress?

That's a fair comment. We'd like to be able to resolve it, without going to Congress but at the end of the day, that may be what is required.

What are your thoughts on your regulator beefing up its exam force?

I am a big supporter of that. I think that will actually be John Korsmo's legacy. He looked at what one of the primary purposes was, safety and soundness regulation. I think out of 120 employees, we had eight examiners. That ratio is a little out of whack. While we have good examiners, I think they are over-worked. So what we have now is new regulatory management back there, and I think they deserve a chance. They've got a plan on how to improve things and I think we ought to fund their request.

There has been a lot of discussion system-wide about concentration issues. What are the concentration considerations within the Des Moines bank?

We are pretty much middle of the pack. Our top five borrowers represent about 45 percent of our business. We have a policy in place that limits the amount of credit that is available to five times our capital, and no one is beyond that.

What do you think your typical customer is using?

I would say a typical customer is using 5 percent to 10 percent of assets. We have some in the 30 percent to 40 percent range, and some that are non-borrowers, but one thing we have been very pleased with is we have the largest percentage of members using our services. We have 1,200 members and more than 75 percent are actually borrowing members. During the course of the year about 90 percent use our borrowings, but at any one time, it is about 75 percent of our membership.

How about products in development? Anything going on at the Des Moines bank?

Over 90 percent of our members are community financial institutions. Those institutions frequently run into over-line problems. They will make a loan in their community, and because they have legal lending limits, they participate it out with other institutions - in many cases, other institutions in the district. We have been approached by several members that this is a need that they have - to be able to take their share of the participation and use it as collateral for their Federal Home Loan Bank. We have told them we will take a look at this issue and try to bring resolution to it in the second half of this year.