Policy on Federal Home Loan Bank access penalizes banks for pandemic-era response
Washington, D.C. (Nov. 1, 2022) — The Independent Community Bankers of America (ICBA) today called on the Federal Housing Finance Agency and the federal banking regulators to align their capital rules to avoid penalizing community banks for supporting local communities during the COVID-19 pandemic.
In a new letter to the agencies, ICBA said the FHFA’s capital restrictions on accessing Federal Home Loan Bank advances threaten to transform the recent rapid market decline in bond prices into a longer-term problem if the agencies don’t align their capital standards. Today’s letter follows a recent joint letter to the FHFA from ICBA, the American Bankers Association, and their respective affiliated state banking associations.
“Without federal regulators collaborating to immediately align their capital rules, community banks may soon be forced to realize what are now only unrealized losses — an unfortunate outcome that could needlessly undermine access to liquidity amid a period of economic volatility and uncertainty,” ICBA President and CEO Rebeca Romero Rainey said today. “Proper regulatory action now can prevent a needless negative outcome going forward for community banks and the communities they serve.”
ICBA offered several approaches to resolve the impact of the agencies’ inconsistent regulations. Federal banking regulators may provide written authorization to each affected bank’s Federal Home Loan Bank to ensure continued access to advances. Alternatively, the FHFA could issue an interim final rule aligning its regulations on tangible capital with those of the banking agencies, avoiding unintended consequences for banks and the financial markets.
The change is needed given the impact of sudden changes to bond market values. Due to low interest rates and emergency stimulus payments to Americans during the COVID-19 pandemic, many banks conservatively invested excess liquidity in low-risk U.S. Treasuries, agency mortgage-backed securities, and municipal securities.
The Fed’s rapid rate hikes are now shrinking bond prices, causing “paper” losses for some bank balance sheets. This would have minimal impact if not for the FHFA’s unique capital rules that limit access to FHLB advances for banks under certain capital levels unless their primary federal regulator requests an exception in writing, needlessly restricting access to an important liquidity tool and necessitating the regulatory update.
The Independent Community Bankers of America® creates and promotes an environment where community banks flourish. ICBA is dedicated exclusively to representing the interests of the community banking industry and its membership through effective advocacy, best-in-class education, and high-quality products and services.
With nearly 50,000 locations nationwide, community banks constitute roughly 99 percent of all banks, employ nearly 700,000 Americans and are the only physical banking presence in one in three U.S. counties. Holding more than $5.8 trillion in assets, over $4.8 trillion in deposits, and more than $3.5 trillion in loans to consumers, small businesses and the agricultural community, community banks channel local deposits into the Main Streets and neighborhoods they serve, spurring job creation, fostering innovation and fueling their customers’ dreams in communities throughout America. For more information, visit ICBA’s website at www.icba.org.