Banks In US Push To Ease Sting Of GSE Write-Downs
By Daniel at 19 September, 2008, 1:00 am
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WASHINGTON (Dow Jones)–Banks in the U.S. are pushing for broad regulatory
forbearance to ease the sting of write-downs triggered by the federal takeover of
Fannie Mae (FNM) and Freddie Mac (FRE), even as regulators continue to signal
they will relax rules for just a subset of banks.
The Federal Deposit Insurance Corp. on Thursday reminded banks that they would
have to write down their losses on investments in the two mortgage giants’ stock
and deduct them from their regulatory capital.
It reiterated that it would work with a “limited number” of smaller banks to
restore capital under federal guidelines, saying it was “committed to a flexible
supervisory approach.”
“It appears to me like they’re going to stick to the books, so to speak, with how
they deal with institutions holding significant amounts of the preferred shares,”
said Camden R. Fine, president and CEO of the Independent Community Bankers of
America, or ICBA.
Industry lobbyists have barnstormed bank regulators and written to lawmakers and
Treasury Secretary Henry Paulson since the Sept. 7 takeover of the
government-sponsored enterprises hammered their holdings of the mortgage giants’
stock.
The shares are widely held by banks because of favorable tax treatment on their
dividends. Also, regulators require commercial banks to hold only a fraction of
their capital against the mortgage giants’ shares compared with other
investments.
Now that the stocks’ value has plummeted, bank lobbyists are pleading with
officials to address the damage.
In particular, they want ample time to replenish their capital if they fall below
levels required by regulators due to the write-downs. Once below that level,
federal law requires banks to submit a capital raising plan within 45 days. But
banks say that current market conditions could make that difficult.
Fine said he was encouraged by the FDIC’s use of the word “flexible” to describe
its approach to working with banks to restore their capital.
In a letter sent Thursday to Paulson and the banking regulators, the American
Bankers Association laid out a course of action to head off problems for its
members.
The trade group urged them to restore a portion of the dividends on Fannie and
Freddie preferred shares, which had been shut off due to the federal takeover.
Alternatively, it asked them to wait to suspend the dividends until after
officials and lawmakers had time to assess the impact.
In its letter, the ABA also echoed a demand made by ICBA this week for a tax
change allowing banks to treat their losses on their GSE investments as ordinary
losses rather than capital losses.
Under the tax code, stock investments are treated as capital assets. But since
commercial banks are barred from holding stocks other than Fannie and Freddie,
they can’t use these capital losses as an offset for capital gains. By treating
the investments as ordinary losses, banks could use them to offset gains from
investments in debt securities.
In addition, the ABA wants regulators to lower the amount of capital banks must
hold against GSE debt and mortgage-backed securities. Currently, they must hold
capital equal to 20% of the value of such investments.
On Thursday, representatives from the FDIC, the Office of Thrift Supervision, the
Federal Reserve and the Office of the Comptroller of the Currency held a
conference call with ICBA’s membership.
According to Fine, the regulators expressed their sympathy for the banks’ plight
and admitted that they underestimated the breadth and depth of the problem.
Roughly 700 lines dialed in to the call, Fine said.
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