ICBA - Publications - FDIC Objects to FHLB Prepayment Fees

FDIC Objects to FHLB Prepayment Fees

WWR Article
May 23, 2003

The FDIC's efforts to seek legislative relief in a dispute with the Federal Home Loan banks over FHLB prepayment fees for failing banks fell short this week. The House Financial Services Committee did not consider the issue in its markup of the regulatory relief bill. FDIC had sought an amendment that would prevent or limit the ability of FHLBs to collect prepayment fees on advances to institutions that fail. The FDIC argues that the fees increase losses to the deposit insurance fund, uninsured depositors and other creditors of the failed bank.

ICBA, ACB and ABA wrote jointly to chairman Mike Oxley (R-OH) and ranking member Barney Frank (D-MA) to object to such a provision, noting it would have far-reaching, negative implications for the 8,000 members of the FHLBs and their cost of funds. To protect their safety and soundness and mitigate interest rate risk, the FHLBs would have to adjust their lending practices for medium and long-term advances, and could increase the cost of advances for all institutions or restrict their availability. The associations also objected to an FDIC-suggested solution under which the FDIC would pay costs of unwinding hedges on advances to banks with more than $5 billion in assets, but pay only 50% of such costs for smaller banks. Such a solution would discriminate against community banks.

The FDIC and the FHLBs had been trying to work out a resolution. The 12 FHLBs had jointly proposed a non-legislative compromise to ensure FDIC would not pay full prepayment fees, but would have to compensate the FHLBs for the cost of unwinding the transaction. "It is premature for Congress to attempt to resolve this issue," the associations said.