In a letter to Seattle Federal Home Loan Bank members, President and CEO Richard Riccobono said the Seattle Bank will likely report a risk-based capital deficiency as of Dec. 31, 2008, before adding, ‘We believe that the calculation of risk-based capital under the current rules significantly overstates our market risk in the current market environment.’
Riccobono expressed confidence that the bank, which holds nearly $2.8 billion in permanent capital, will be able to meet members' liquidity and funding needs. He explained that the bank is required to hold risk-based capital equal to at least the sum of its credit-risk, market-risk and operations-risk capital requirements.
"One component of the market-risk requirement is that we maintain capital equal to the amount by which the market value of our assets is less than 85 percent of their book value," Riccobono wrote. "With the continued decline in the market value of our private-label mortgage-backed securities, our market-risk capital requirement has increased significantly."
Federal Housing Finance Agency regulations requires Federal Home Loan Banks that fail to meet any regulatory capital requirement may not declare a dividend or redeem or repurchase capital stock.
"As such, the Seattle Bank will not be able to redeem or repurchase any Class A or Class B stock outstanding while a risk-based capital deficiency exists," the letter continues. "As you know, the Seattle Bank has not repurchased Class B stock since 2004 and recently announced that we would not pay a dividend in fourth quarter 2008."
SOURCE: Seattle Federal Home Loan Bank