FHLB president, economist, upbeat at BHCA spring seminar

Northwestern Financial Review, Jun 1-Jun 14, 2003 by Bengtson, Tom

Three quarters of the members of the Federal Home Loan Bank of Des Moines will get a stock refund, president Pat Conway told a luncheon crowd gathered for the spring seminar of the Bank Holding Company Association, May 6 in Bloomington, Minn. Conway, president of the Federal Home Loan Bank of Des Moines since October 1999, said 897 members will get a stock refund when the bank implements its capital plan on July 1. Up to 354 financial institutions will be required to purchase additional stock in order to retain their membership. Conway said in the four other Home Loan Banks where new capital plans have been implemented, only a very small number of banks have elected to terminate their membership because they chose not to purchase additional stock. Conway said the new plan is designed to give the Home Loan Banks "a more permanent capital regime and more risk-based capital."

Conway and former Federal Reserve Board Vice Chairman Alan Blinder were featured speakers at the twice-a-year seminar.

The banks in the Home Loan Bank system adopted expanded definitions of collateral when Congress passed the Gramm-Leach-Bliley Act in 1999. The new definitions, Conway said, gave members of the Des Moines bank 75 percent more borrowing capacity, or the opportunity to borrow $358 million more than under old collateral rules. Ninety-nine Des Moines bank members are taking advances using the new forms of collateral, Conway said.

Conway said the Gramm-Leach-Bliley law clarified that Home Loan Bank retained earnings are owned by the member financial institutions. He said in the 1980s, ownership of the retained earnings was unclear and Congress ended up using the money to help fund the savings and loan industry bailout.

Two controversial issues have dominated news about the Home Loan Banks in recent months, Conway noted - multi-district membership and SEC registration. The Home Loan Banks are divided on the question of whether a single institution should be allowed to hold membership in more than one Home Loan Bank. The 12 Home Loan Banks, Conway explained, were given geographic franchises. "That's not the way banking works today," he said. "We should recognize that the world has changed and we should do something."

Conway acknowledged that "there is some level of multi-district membership that we could live with," but he said the Des Moines bank prefers a multi-district participation approach above other options. He said such an approach would offer the same benefits of multi-district membership, but offer a better risk management proposition.

Conway spoke strongly against the effort to require Home Loan Banks to register their stock with the Securities and Exchange Commission. "The spin is that we don't want to fully disclose our financial condition, and nothing could be farther from the truth," Conway said, noting that the Home Loan Bank has followed extensive disclosure guidelines since 1999.

Conway said if the Home Loan Banks register with the SEC, the banks would need to maintain a higher level of liquidity. The additional liquidity would be needed to safeguard against interruptions in operations caused by regulatory concerns that currently can be addressed in days by the Federal Housing Finance Board but might take weeks or longer under the SEC, which regulates 10,000 to 15,000 entities. "This is strange considering the one thing Congress has criticized us for is maintaining too much liquidity," he said. Higher levels of liquidity, he said, would require higher levels of capital, which the Home Loan Banks would need to solicit from members. He also said higher levels of capital would hurt their earnings capability.

"We are looking for a political compromise here," Conway said. "This could mean that we will file reports that exactly match SEC requirements, but that we file them with our existing regulator." He said 11 of the 12 banks favor this approach.

Blinder, in a wide-ranging presentation that looked at the economy from both macro and micro perspectives, said the U.S. economy "has shown remarkable resilience." It has weathered a faltering stock market, terrorist attacks and seemingly never-ending corporate scandals. "Despite these factors, there hasn't been one failure of a large financial institution," he remarked.

He attributed the strength of the financial system to strong capital levels, ever-improving risk management techniques, and regulation that is better today than it was 20 years ago.

Blinder outlined the "Greenspan scenario," in which the Federal Reserve Board chairman expects the economy to be positive through the remainder of the year. Under this scenario, the economy gets a boost from the resolution of the U.S. war in Iraq, the Fed leaves interest rates where they are, and long rates rise. Blinder said he agrees with this scenario.

Blinder concluded by urging bankers to manage their risks, even if they can't control them. He said the current economic environment has made it easy for banks to attract funds, even if rates are extremely low and net interest margins are razor thin. He encouraged bankers to "plan for the day when rates are higher and funding is harder to come bv."