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NEWS RELEASE
Sept. 22, 2008
Contact: Jim Eberle
(202) 663-5477
E-mail: jeberle@aba.com
ABA RENEWS CALL FOR ACTION ON GSE's PREFERRED STOCK,
CITES SURVEY SHOWING MORE BANKS HOLD THESE SECURITIES
WASHINGTON – The American Bankers Association, citing a survey showing that a greater number of banks than originally assumed hold the preferred stock of Fannie Mae and Freddie Mac, renewed its call today for government action to rectify the issue.
When the Federal Housing Finance Agency placed Fannie and Freddie in conservatorship, the payment of dividends on preferred stock was eliminated. At the time, federal banking regulators estimated that only a few dozen banks would be affected.
However, an ABA survey shows that the number of banks affected is considerably larger. While there is no systemic risk involved, without action banks' capital and therefore lending will be reduced.
The ABA industry survey found nearly 27 percent of banks hold preferred stock of Fannie and Freddie. In addition, 3.4 percent of banks hold auction-rate securities backed by the preferred stock. The average exposure to banks' core capital was 11 percent.
"The negative impact on banks – particularly Main Street community banks – is far greater than the regulators first thought," said ABA President and CEO Edward L. Yingling in a letter to Treasury Secretary Henry Paulson and the four federal banking regulators.
"The impact on capital from the Fannie and Freddie preferred stock write-downs will restrain even the best banks in this country from making new loans," Yingling added.
ABA renewed its request, stated in a Sept. 18 letter, for a comprehensive approach to resolving the preferred stock issue. ABA listed six actions that should be taken by government:
- Dividends on preferred stock should not be reduced until after the September 30 end of quarter, permitting Congress and the regulators to assess the implications and address solutions.
- A reasonable level of dividends should be paid, which would restore a portion of the share value and reduce impairment charges.
- For tax purposes, losses should be treated as ordinary income and allowed to be offset against a bank's ordinary income. (ABA recommends that this be authorized in the financial rescue legislation to be considered this week.)
- The risk weightings on Fannie and Freddie debt and guaranteed mortgage backed securities should be reduced from the current 20 percent weight.
- The risk weighting of auction rate preferred securities backed by Fannie and Freddie should be 20 percent.
- The banking regulators should increase the flexibility of capital restoration plans for banks that fall below minimum standards.
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The letter is attached.
The American Bankers Association brings together banks of all sizes and charters into one association. ABA works to enhance the competitiveness of the nation's banking industry and strengthen America’s economy and communities. Its members – the majority of which are banks with less than $125 million in assets – represent over 95 percent of the industry’s $13.3 trillion in assets and employ over 2 million men and women.
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