Government Relations

FDIC Proposal on Deposit Insurance Premiums

On October 7, 2008, the FDIC announced deposit insurance premium increases to restore the depleted Deposit Insurance Fund (DIF) to a reserve ratio of 1.15% over a five-year period. A number of recent developments are not reflected in the proposal including:

• The Emergency Economic Stabilization Act signed into law on October 3 raised deposit insurance coverage levels to $250,000 while leaving this increase out of the calculation of the DIF ratio (DIF reserves divided by estimated insured deposits).
   

• On October 14, the FDIC, the Treasury and the Federal Reserve, in consultation with the President, invoked extraordinary systemic risk authority to extend deposit insurance coverage to all non-interest bearing transaction deposit accounts (while leaving this increased coverage out of DIF ratio calculations) and to provide FDIC guarantees to unsecured debt issuances of insured depository institutions at a cost of 75 basis points.

These actions, deemed necessary by the federal government, are not consistent with the rationale behind the proposed new premium structure, which was developed prior to these actions. Moreover, the above actions will expire on December 31, 2009, thereby ensuring a comprehensive review of the nation’s deposit insurance system in 2009. Finally, these actions suggest that current “extraordinary circumstances,” as established by law, would allow the FDIC to extend the period to restore the DIF’s reserves.

Summary of Restoration Plan & Implications of FDIC Proposal

Click here for a draft comment letter. Comments must be received by the FDIC on this proposal on or before December 17, 2008. Click here for a signed copy of FHLB Des Moines comment letter.
 

Federal Banking Agencies Proposal to Lower Capital Risk Weights for Fannie Mae and Freddie Mac Debt

The federal banking agencies (FDIC, OCC, Federal Reserve, and OTS) have proposed a rule that would lower the capital risk weights that banks assign to Fannie Mae and Freddie Mac debt from 20% to 10% percent. The proposal specifically requested comments – due by November 26, 2008 – on the potential effects of the proposal on FHLB debt. We believe that the final rule should extend the same treatment to FHLB debt for the following reasons:

• In the current financial crisis, funds flowing from the FHLBs to local banks remain a critical source of liquidity for communities throughout the country. With credit markets squeezed, banks continue to rely on the FHLBs to finance home, agricultural, and business loans. The FHLBs have provided daily support to the housing market since the crisis began last August and continue to do so. Unequal capital treatment for FHLB debt will mean higher costs of lending for housing and economic development. Keeping credit available at the lowest possible cost will be an important part of a national strategy to stabilize the economy and protect the needs of citizens and businesses.
   

• Throughout the course of the government’s response to the crisis in the housing and credit markets, extraordinary care has been taken to recognize and affirm the importance of the FHLBs as a source of liquidity to their members. When Fannie Mae and Freddie Mac were placed into conservatorship, Federal Housing Finance Agency Director Lockhart stated that the FHLBs have “performed remarkably well.” The proposal could have the perverse effect of punishing the FHLBs for their exceptional performance during these difficult times.
   

• By not including the FHLBs, the proposal suggests that the FHLBs do not have the same degree of government support as do Fannie Mae and Freddie Mac. In fact, recently passed legislation created a new regulator to oversee all categories of housing GSEs. The legislation also established temporary authority for Treasury to purchase obligations of all types of housing GSEs. In addition, when Treasury established the GSE Credit Facility this September as a backstop lending facility, the facility was made available to the FHLBs, not just for the Fannie Mae and Freddie Mac model. Finally, the New York Fed is providing support for the FHLBs, as well as Fannie Mae and Freddie Mac, by purchasing their discount notes in recent open market operations.
   

• If investors believe that FHLB obligations are somehow less creditworthy than obligations of Fannie Mae and Freddie Mac, then investors will demand higher yields to purchase FHLB bonds, resulting in higher advance rates. Spreads between FHLB senior debt and comparable bonds issued by Fannie Mae and Freddie Mac have widened by 20 to 30 basis points since these entities were placed into conservatorship, and this proposal could further widen these spreads. This would have the unintended effect of increasing the cost of FHLB advances and raising the cost of funding for thousands of community banks.

Click here for a draft comment letter. Click here for a signed copy of FHLB Des Moines comment letter.
 

Farm Credit Administration

• Comment Letter on Farm Credit Administration Rule

Maps and elected congressional members for each of our five states.