Investment in the Common Stock of the Federal Home Loan Bank
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) opened membership in the Federal Home Loan Bank System to commercial banks. Recent changes in Wisconsin Statutes provide that Wisconsin state chartered banks may purchase capital stock of the Federal Home Loan Bank for the purpose of becoming a member of the Federal Home Loan Bank and establish limitations for pledging of bank assets to the Federal Home Loan Bank if borrowing privileges are exercised.
A bank may invest in common stock of the Federal Home Loan Bank to the extent permitted under both Wis. Stat. s. 221.0306 and Wis. Stat. s. 221.0321. A bank's aggregate investment in common stock of the Federal Home Loan Bank is determined by adding (1) the minimum level of common stock required for a bank's membership in the Federal Home Loan Bank under Wis. Stat. s. 221.0306 and, (2) for common stock in an amount greater than the minimum level required for membership, the level at which a bank is permitted to invest in equity investments established by the division under Wis. Stat. s. 221.0321(3).
The purpose of membership in the Federal Home Loan Bank is to provide financial institutions a funding source through borrowings from the Federal Home Loan Bank. The purpose of this letter is to advise you on issues which should be considered in evaluating if an investment in and borrowing from the Federal Home Loan Bank is beneficial for the bank. The statutes require that the investment in Federal Home Loan Bankstock be approved by the bank's board of directors. The division of banking may prohibit a bank from becoming a member if the bank's capital and surplus is less than the amount required for that bank or if the division finds that the bank is in an unsafe or unsound condition. It is expected that any activity undertaken will be managed effectively and monitored by the board of directors.
To become a member of the Federal Home Loan Bank, the bank must purchase Federal Home Loan Bank stock based on a formula. The board of directors should consider if Federal Home Loan Bank stock is a good investment. The return on this investment will depend on the profitability of the regional Federal Home Loan Bank being invested in. It should also be determined if additional profits can be generated from the use of available credit services to fully offset the expected expense of the membership.
Under Federal Home Loan Bank requirements, eligibility for membership, purpose for borrowing, and assets acceptable for collateral are largely dependent on the level of residential mortgages or other real estate related assets of the bank. Therefore, the board of directors should consider the bank's ability to meet local residential mortgage loan demand and the role of housing finance in the bank's overall strategy. The bank's loan, investment and asset/liability management policies should be reviewed, revised, and approved as necessary.
As borrowing from the Federal Home Loan Bank must be fully collateralized and carry a prepayment penalty, the board of directors should consider the bank's capacity for managing interest rate risk, liquidity risk, and the bank's ability to cover or to pass on the potential expense of the prepayment penalty. Pledges of collateral to and loans from the Federal Home Loan Bank are restricted under Wis. Stat. s. 221.0324(9).
Other factors to be considered by the board of directors include the bank's ability to safely and soundly manage asset growth resulting from the related debt with the Federal Home Loan Bank, and the adequacy and ability of support personnel to properly process loan documents and other related paperwork.
Banking Letter 45, August 19, 1991, Commissioner Sherry
Amended July 22, 2002, Michael J. Mach, Administrator