ICBA - News - News Release - ICBA Affirms Opposition to Proposed Finance Board Rule on Retained Earnings and Dividends
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ICBA Affirms Opposition to Proposed Finance Board Rule on Retained Earnings and Dividends

Washington, D.C. (July 14, 2006)—The Independent Community Bankers of America (ICBA) affirmed its opposition to a Federal Housing Finance Board rule to proscribe a minimum amount of retained earnings for Federal Home Loan Banks. ICBA called on the FHFB to withdraw the rule to further examine the proposal. ICBA made its concerns known in a comment letter to the Finance Board.

"A safe and sound FHLB system is vitally important to community banks that depend on FHLBs for liquidity, long term funding, a secondary market option, and other important products and services," ICBA said. "Community banks also want a financially strong system because they hold a great deal of FHLB debt as investments."

While ICBA supports the concept that each FHLB should hold some level of retained earnings, the FHFB's methodology and approach in developing this proposal is seriously flawed. Retained earnings policies should be part of each FHLB's capital plan and the appropriate level should be determined for each FHLB, not by an arbitrary across-the-system standard. Also, ICBA told the Finance Board that proposed restrictions on dividends when the retained earnings threshold is not met are overly harsh.

ICBA is concerned that the proposal treats all non-advance assets the same, requiring all to be backed by the same amount of retained earnings, regardless of their relative risk. This will cause FHLBs to favor riskier, higher-yielding assets over lower risk, lower-yielding investments often used for liquidity. While over the longer term a level of retained earnings in all FHLBs can strengthen the system, ICBA is greatly concerned that the proposal will destabilize the Federal Home Loan Bank system over the short- to medium-term.

ICBA also opposes the prohibition on stock dividends, which most FHLBs have periodically used and that allow FHLB members to defer a tax liability until the stock is redeemed. "There is simply no need to prohibit this long standing practice," ICBA wrote. In addition, "limits on excess stock should be set by each FHLB based on its particular situation, not as an across the board arbitrary limit," ICBA said.

The FHLBs have spent several years and significant dollars to develop new capital plans as called for by the Gramm-Leach-Bliley Act of 1999, plans that already address issues raised by the proposed rule and that the FHFB approved. Now, the FHLBs would face a new retained earnings requirement not anticipated in that process.

View the complete comment letter at www.icba.org.