Imagens das páginas
PDF
ePub

December 16, 1986

The Honorable Edwin Gray

Chairman

Federal Home Loan Bank Board 1700 G. Street, N.W.

Washington, DC 20552

Dear Chairman Gray:

I am writing you in regard to the Board's consideration

of the direct investment regulation.

I am well aware of the controversy surrounding the issue and the possibility of a short extension to accommodate hearings. Some well-capitalized and well-run institutions may have valid concerns which, after careful scrutiny, might lead the FHLBB to modify the rule by granting more flexibility for such

institutions.

On the other hand, the 10%-of-assets test might prove to be too generous for some institutions. Without question, continued analysis of a direct investment regulation is necessary.

However, it is my considered judgment that a clear majority of the Members of Congress are in favor of extending the limitation on direct investments. As a general rule, if the Congress acts on an issue, it becomes a more permanent decision. Such a result would limit the flexibility of the FHLBB to implement modifications to the rule now and/or in the future.

Therefore, I strongly recommend that the Bank Board extend the direct investment regulation for at least one year, making only those modifications, if any, that it believes are currently justifiable.

Sincerely,

Jake Garn

Chairman

[blocks in formation]

Attached is the transcript of the Federal Home Loan Bank
Board's meeting on Direct Investment.

The meeting, held on December 18, 1986, explores in detail the evidence in support of the Board's Direct Investment Regulation and the views of the Board Members and Staff on related issues.

You may find the transcript interesting reading.

Sincerely,

No one can possibly disagree that the fund remains in a weakened condition, even more so than when the Committee report was prepared in 1985. Indeed, the FSLIC fund has primary reserves today of $2.2 billion, reserves which stand behind more than $800 billion in insured deposits.

With respect to direct investments, the staff study in June of this year concluded that for failed thrift institutions, each dollar of direct investment increases the cost to the FSLIC for losses by 60 to 85 cents on the dollar for such investments. The staff also recently updated a fall, 1984, study by Dr. George Benston of the University of Rochester, a leading proponent of unrestricted direct investment by FSLIC-insured institutions. In addition, the staff looked at the California experience--that is to say, what has happened to 33 state-chartered California institutions which had in excess of 5 percent of assets in direct investments in December of 1983. And the staff will present information today on those studies.

At the outset, let me say that I am a strong proponent of the direct investment rule. This is not because I believe it is nearly as strong as it should be, but rather because it stands as a symbol of the Board's resolve to protect the scarce reserves of the FSLIC fund.

I believe the conceptual approach taken in the regulation is sound, even though it needs to be strengthened, in my opinion.

Chairman Volcker of the Federal Reserve and Chairman Seidman of the FDIC have both sent letters to the Board indicating firm support for extension of the regulation.

Senators Proxmire and Garn also have expressed support for the regulation and its extension. Their letters are available to you over here, I believe, or wherever they have - the desk.

-

In my opinion, there is a very strong reason to believe that the fate of the extension of the direct investment regulation is inextricably tied to legislation which would recapitalize the FSLIC. In this regard, I believe that failure by this Board to extend the regulation not only would send the worst possible signal to leaders in the Congress and the financial community regarding the firmness of resolve by the Board to safeguard the FSLIC fund from the risk of future losses, but such a failure would, in all likelihood, result in strong provisions enacted by Congress incorporating restrictions on direct investment authorities which could well be more restrictive than what is being proposed to the Board today.

In all candor, ladies and gentlemen, if this regulation is not extended in a manner which can soon serve to communicate to Congress the Board's firm position on the direct investment issue, I intend to urge the Congress to tie this issue to passage of any FSLIC recapitalization legislation. I say this because, as Chief Executive Officer of the FSLIC, given the losses the fund is experiencing and will experience as a result of direct investments, recapitalization of the FSLIC would make little sense if future loss hemorrhages to the fund from such activity are not halted.

Bank Board Meeting

Thursday, December 18, 1986 2:07 p.m., Open Meeting

MR. SCONYERS: Ladies and gentlemen, may we please come to order. This is an open meeting of the Federal Home Loan Bank Board.

On behalf of the Chairman and Board Members Henkel and White, I

extend a welcome to our guests.

The Board has received a report regarding notational items individually voted upon. This report will be incorporated into the minutes of this meeting and will become an official part of it. Mr. Chairman?

MR. GRAY: Thank you, and good afternoon.

We are meeting today to decide the fate of a regulatory proposal which would extend the Board's Direct Investment Regulation for another two years. The current regulation expires on December 31st.

The regulation in place now, which was adopted by the Board nearly 23 months ago, uses the concept of a supervisory review threshold beyond which State-chartered FSLIC-insured thrift institutions must obtain supervisory approval to exceed the threshold. The threshold is 10 percent of assets or twice net worth, whichever is greater.

Since the regulation has been in place, the Bank Board's Principal Supervisory Agents have given approval to some 60 percent of applicants which have applied to exceed the threshold for applications which have been acted upon thus far.

In my opinion, the Principal Supervisory Agents have administered the supervisory review process, at the threshold levels that I've outlined, in a fair and evenhanded manner. The supervisory agents, operating under delegated authority, have in essence taken into account an applicant's financial strength, quality of management, track record over time, and the potential impact of the application on the health of the FSLIC.

The Board adopted the regulation at the end of January 1985 because of its concerns about the adverse impact on the FSLIC fund of direct investments when institutions with high levels of such investments failed.

After a lengthy study by the House Government Operations Committee on the Bank Board's Direct Investment Regulation in 1985, the Committee concluded that the rule was", a prudent precaution while the FSLIC is in a

In my capacity as Chief Executive of the FSLIC, in the absence of an effective regulatory mechanism to prevent losses from misuse of direct investment authorities, I do find it a vexing irony that I am at once responsible for the fund, but without adequate regulatory tools to protect it from substantial losses and the high risk of loss in the future.

The direct investment regulation being proposed to the Board for extension today is, in my opinion, an exceedingly mild, prudential device and is a far less restrictive one than regulatory measures now under consideration by the Federal Reserve and the FDIC for commercial banks and bank holding companies.

In a very real sense, the Bank Board's principal mission is to serve as the Board of Governors of an insurance carrier, the FSLIC. Our Sworn responsibility to the citizens of this country is to do our level best to protect the federal deposit insurance system on their behalf.

As operators of an insurance carrier, we are obliged, it seems to me, to take into account the risk of loss to the FSLIC, from activities which are engaged in by insured thrift institutions, and to underwrite that risk as best we possibly can.

The taxpayers of this country, the citizens of this country, have a right to expect that we, as public servants, carry out our responsibilities as trustees of the FSLIC in a manner which best serves the public interest.

We are not the property of the thrift industry, even though we do, and should, work very hard to facilitate industry health. More importantly, we are servants of the public, including the American taxpayers, who ultimately stand behind the insurance carrier we operate as a public trust. We operate the FSLIC on behalf of the public, citizens who, through their elected representatives, have chartered the national thrift system, including the FSLIC, as instrumentalities of public policy.

Again, the public does count on us to do the right thing, and to assure that we make every effort to protect their FSLIC fund.

With this in mind, I do sincerely hope that this Board will assume its responsibility today in the continuing effort to protect the reserves of the FSLIC.

Those are my opening comments, and I would like to call on my colleagues, Mr. Henkel and Mr. White, to express any opening comments that they might have before we get into the staff presentation. Mr. Henkel?

MR. HENKEL: Mr. Chairman, I'd like to make a brief opening comment and reserve some further comments because I intend to make a motion at the appropriate time.

« AnteriorContinuar »