The American Bankers Association, Independent Community Bankers of America and more than 70 state banking associations today submitted a letter to the Federal Housing Finance Agency urging it to stop using tangible capital when deciding whether financial institutions qualify for Federal Home Loan Banks advances.
In their letter, the groups pointed to regulatory language directing the FHLBs to use tangible capital in assessing a commercial bank’s credit worthiness for purposes of issuing advances. They said a far better assessment metric is Tier 1 capital as defined by the Federal Reserve, FDIC and the Office of the Comptroller of the Currency, which “offers the best picture of a bank’s financial condition. “
“As the bank regulators have recognized, looking to tangible capital could create confusion and, in a rising interest rate environment such as today’s, incorrectly suggest that otherwise sound banks are not creditworthy for purposes of access to FHLB advances. This is particularly true for community banks,” they said.
The groups said the switch could be done most efficiently through an interim final rule. “Making the change from tangible capital to regulatory capital in the near term, prior to any future stress, would help to ensure that banks, particularly smaller banks, have seamless access to an important liquidity tool without compromising the FHLBs’ ability to screen for troubled institutions or work with a bank’s PFR,” they said. “Failure to fix this inconsistency in the regulations may exacerbate a stress as banks continue to navigate rising rates and the ongoing macroeconomic volatility.”