Regulator, Chicago Home Loan Bank enter agreement

Northwestern Financial Review, Aug 1-Aug 14, 2004

The Federal Housing Finance Board entered into its first publicly announced written agreement June 30. The agreement with the Chicago Federal Home Loan Bank came on the same day the bank said goodbye to long-time president Alex Pollock and named Charles A. Huston its acting president.

The voluntary agreement requires the bank to submit a three-year business and capital management plan, and hire consultants to review the bank's management, risk management, internal auditing and accounting/record keeping functions. The agreement also requires the bank to limit growth of its acquired member assets to 10 percent per year, and to maintain a capital ratio of 5.1 percent. The Chicago bank has the highest capital of the 12 Federal Home Loan Banks; the statutory minimum for Federal Home Loan Banks is 4 percent.

David Feldbaus, spokesperson for the Chicago Federal Home Loan Bank, said the written agreement will have no impact on the service offered to the bank's 883 members in Illinois and Wisconsin. He said the written agreement does not address any financial concerns at the bank, and noted that the bank is paying a 6 percent dividend on August 13 on second quarter earnings.

"Our basic concern at the Chicago bank was that it was growing very rapidly, and had the largest mortgage portfolio of any of the Home Loan Banks," explained Stephen Cross, director of supervision for the Finance Board, which is the chief regulator for the Federal Home Loan Banks. Mortgages, he said, "pose risks that are not the traditional risks that the Home Loan Banks experience with the advance business. What was called for was more complex management of interest rate risk in particular, and in Chicago's case, operational risks, because they represent the back-office engine of the Mortgage Partnership Finance program.

"The bank's business is growing faster than its demonstrated capacity to manage, to our satisfaction, all aspects ofthat business," Cross said.

The Finance Board first raised its concern with the Chicago bank following its examination in 2003. The Finance Board moved up the schedule of its 2004 examination of the bank and offered the written agreement in late June, a move which came as a surprise, said Pollock. Having announced his intent to retire last fall, Feldbaus said there is no relationship between the timing of Pollock's departure and the written agreement.

Huston, 56, has been responsible for new business and customer relationships since joining the bank in 1991.