So far in 2009, the Federal Deposit Insurance Corporation’s (FDIC’s) Deposit Insurance Fund (DIF) has suffered nearly $11 billion of losses in 37 failed banks. Twenty-seven of these banks received a total of $6.4 billion of advances (loans) from Federal Home Loan Banks (FHLBs). When banks that fail still have advances outstanding from FHLBs, the costs to the DIF are increased. This is because the FHLBs’ loans are secured borrowings—they are first in line to be paid back. And the loans also come with prepayment penalties.
In the case of IndyMac, which failed last July, $9 billion of losses to the DIF included $6.3 billion of FHLB advances and a $341 million prepayment penalty. The May 2009 failure of BankUnited, a Federal savings bank headquartered in Coral Gables, Fla., resulted in losses of $4.9 billion to the DIF. The FHLB of Atlanta had secured loans of $4.8 billion outstanding to BankUnited, as of March 31, 2009, when the bank filed its last quarterly report.
In a January press release, John Bovenzi, the FDIC’s chief operating officer for the IndyMac receivorship, remarked, “It is unfortunate that many of banks that have failed last year had a heavy reliance on Federal Home Loan Bank advances.” Unfortunately, the losses to the Deposit Insurance Fund arising from FHLB advances to failing banks probably will continue.
Meanwhile, all is not well with the condition of the FHLBs. Six of the 12 FHLBs reported losses for the first quarter of 2009. Leading the way was the FHLB of Boston with a loss of $83.4 million, followed by Chicago ($39 million), Pittsburgh ($23.6 million), and Seattle ($16.2 million). The FHLB of Seattle recently acknowledged a $467 million capital deficiency and currently is listed as undercapitalized by its federal regulator, the Federal Housing Finance Agency.
The FHLBs’ losses should alert policymakers to the need to reform the FHLB System so that losses are not transferred to the FDIC and, when the DIF is depleted, to other FDIC-insured banks and, ultimately and potentially, to the taxpayer.The DIF balance is down more than $40 billion since Dec. 31, 2007, and is currently around $6.5 billion.
| Top Ten 2009 Failed Banks Ranked By FHLB Advances
(in millions) | | Bank | Closing Date | FHLB Advances* | FDIC Losses | Bank Assets | | BankUnited, FSB, Coral Gables, FL | 05/21/09 | 4,769.0 | 4,900.0 | 12,800.0 | | First Bank of Beverly Hills, Calabasas, CA | 04/24/09 | 320.0 | 394.0 | 1,500.0 | | New Frontier Bank, Greeley, CO | 04/10/09 | 199.4 | 670.0 | 2,000.0 | | County Bank, Merced, CA | 02/06/09 | 185.0 | 135.0 | 1,700.0 | | Alliance Bank, Culver City, CA | 02/06/09 | 110.0 | 206.0 | 1,140.0 | | Omni National Bank, Atlanta, GA | 03/27/09 | 105.0 | 290.0 | 956.0 | | 1st Centennial Bank, Redlands, CA | 01/23/09 | 103.3 | 227.0 | 803.3 | | Riverside Bank of the Gulf Coast, Cape Coral, FL | 02/13/09 | 100.7 | 201.5 | 539.0 | | TeamBank, National Association, Paola, KS | 03/20/09 | 77.9 | 98.0 | 669.8 | | Cape Fear Bank, Wilmington, NC | 04/10/09 | 58.0 | 131.0 | 492.0 | | Total | | 6,028.3 | 7,252.5 | 22,600.1 | *Advances as of the last quarterly report before failure.
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For more on the FHLB System and the potential costs it may pose for taxpayers, see Ronnie J. Phillips’ article “Will ‘Flub’ Follow Fannie and Freddie?" in the January 12, 2009, Research Reports. Available free to AIER subscribers or $2 for non-members.
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$4 million * 300 million = $1200 trillion. That's more money than all the wealth in the world.
The truth is, Federal Home Loan Banks take very seriously their responsibility to coordinate lending activities with the regulators. A Home Loan Bank is expected by its own regulator – the Federal Housing Finance Agency – to coordinate and communicate with the troubled institution’s regulator. When a supervisory concern is raised about a member, it is imperative that the Home Loan Bank work closely with the primary regulator to ensure the best possible outcome. In many cases, the situation, as determined by the regulator, requires additional lending to that institution, to avoid triggering a liquidity crisis that would prematurely cause an institution to fail.
Federal Home Loan Banks work with regulators to help protect taxpayers from the costs of bank failures.
By the FHLBs
O'er the FHFAs we watch
As DIF cost's go steadily increasing.
With apologies to Samuel F.B. Morse
"What hath we wrought?"