ICBA, Affiliated State Associations Urge FHFA to Align Capital Rules with Banking Agencies

Policy on Federal Home Loan Bank access penalizes banks for pandemic-era response

Washington, D.C. (Oct. 18, 2022) — The Independent Community Bankers of America (ICBA) and its affiliated state associations along with other banking organizations today called on the Federal Housing Finance Agency to align its capital rules with those of the federal banking agencies to avoid penalizing community banks for supporting local communities during the COVID-19 pandemic.

In a joint letter, ICBA, the American Bankers Association, and their respective affiliated state banking associations said the FHFA’s capital restrictions on accessing Federal Home Loan Bank advances threatens to transform the short-term market decline in bond prices into a longer-term problem for the banking system if the agency doesn’t update its standard to match banking regulators’ accounting requirements.

“Failure to fix this inconsistency in the regulations may exacerbate a stress as banks continue to navigate rising rates and the ongoing macroeconomic volatility,” the groups said in today’s joint letter. “This in turn may impair banks’ ability to provide credit to U.S. businesses and households, especially the more vulnerable sections of our economy. We encourage the FHFA to work closely with the bank regulators to better align their regulations.”

To ensure the FHFA is using the most up-to-date capital definition, ICBA and the other groups today called on the agency to issue an interim final rule aligning its regulations on tangible capital with relevant Federal Deposit Insurance Corp. regulations regarding Tier 1 capital. The change will ensure FHFA rules are in line with federal banking agency changes enacted a decade ago, avoiding unintended consequences for banks and the financial markets.

The groups are requesting the change given the impact of sudden changes to bond market values. Due to artificially suppressed 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.

Read today’s joint letter.

About ICBA

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.

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