Home Loan Bank of Des Moines converts stock

Northwestern Financial Review, Aug 1-Aug 14, 2003 by Dullum, Justin

The Federal Home Loan Bank of Des Moines implemented a new capital plan on July 1. The bank converted from a subscription capital structure to a permanent structure.

Seven of the bank's 1,250 members discontinued their membership because of the conversion, during which stock requirements for membership were re-evaluated.

"Sixty to seventy percent of our members had excess stock created under this plan," said Ron Greeson, senior vice president of operations. "They actually had stock they could get back. The other third had a shortfall but most of them deemed membership as valuable enough to them to purchase the required stock."

Greeson said the handful of banks that elected not to continue their memberships were not heavy users of FHLB's services. Most banks that emerged from the conversion with stock in excess of the requirement elected to pull it out of the system.

"We ended up having a net decrease in stock," said Greeson. "More members took stock out than left it, increasing their leverage with us as well as being more efficient with their capital."

Prior to the conversion, members were required to maintain an investment in Home Loan Bank capital stock equal to the greater of 1 percent of the member's residential mortgage assets as of the previous December 31, or 5 percent of all currently outstanding advances. Under the new capital structure a member's minimum investment in stock will be equal to the sum of a membership stock requirement and an activity-based stock requirement.

The membership stock requirement is 0.12 percent of a bank's total assets. Members must wait five years to take out their membership stock if they decide to terminate their membership with the bank - a significant change from the previous structure's six-month requirement. "It adds more permanence to the stock," said Greeson. "I think that was the main underlying piece that drove the change."

The activity-based portion of the new structure is where the Home Loan Bank gains more control over its stock, said Greeson, while banks gain more control over the capital they leverage with the bank. For advances and mortgage partnership finance assets, the activity requirement is 4.45 percent. The sum will be assessed monthly and excess stock can be repurchased. "This structure gives member banks more control over how much stock they hold," Greeson said. "If you can get rid of your excess stock, you don't have to have as many investments to leverage your capital."

In order to minimize the number of capital stock transactions, member banks may keep up to $250,000 in excess activity stock.

The stock conversion stems from the Gramm-Leach-Bliley Act of 1999, which established a framework for each Federal Home Loan Bank to establish a new capital structure.

The Des Moines Home Loan Bank is the fifth of the 12 Home Loan Banks to complete its capital conversion. Greeson said every bank's structure would be different and tailored to suit regional needs.