via e-mail
November 3, 2003
Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Attention: Comments
Dear Mr. Feldman:
Members of the National Association of Affordable Housing Lenders (NAAHL)
appreciate the opportunity to comment on the proposed Risk-Based Capital
Rules, commonly known as the Basel proposals.
By way of introduction, NAAHL represents America’s leaders in moving
private capital to those in need. Our 168 members include 71 insured
depository institutions, non-profit providers, GSEs, insurance
companies, pension funds, foundations, and other professionals. Our
mission is to increase private capital lending and investing in low- and
moderate-income communities.
We are concerned about a potential unintended consequence of the
proposed rules that could affect adversely the amount of equity capital
invested in affordable housing and community and economic development.
The proposal appears to be in conflict with 12 CFR Part 24, the
regulation governing investments that are designed primarily to promote
the public welfare.
THE GOOD NEWS
The vital role of these investments in the U.S. is clearly recognized
in part of the proposals. It is apparent that thoughtful U.S. bank
regulators, working with those of other nations, negotiated a special
rule for “Legislated Program Equity Exposures”. This section wisely
preserves the current capital charge on most equity investments made
under legislated programs, “recognizing this more favorable risk/return
structure and the importance of these investments to promoting public
welfare goals.” Insured depository institutions investing as a result of
such programs therefore would set aside, by and large, the same amount
of capital for CRA equity investments under the new rules as they do now
– about $8.00 for every $100 of capital invested.
Given that CRA investments in affordable housing and community and
economic development all have a different risk/return profile than other
equity investments, that treatment is very appropriate. Based on
experience to date – and in the U.S. there is considerable experience –
CRA equity investments may well provide lower yields than other equity
investments. They also have much lower default rates and volatility of
returns than other equity investments. For example, Ernst and Young
reported in 2002 that the loss experienced from housing tax credit
properties over the period 1987-2000 was only .01% on an annualized
basis. It is important that the final regulations make clear that
“investments in CEDES” (CRA equity investments) comprise all types of
activities that are eligible for bank investment under Part 24 as
“Legislated Program Equity Investments” that are held harmless from
higher capital charges.
THE PROBLEM
The “materiality” test of the proposed rules is of great concern (cf
page 45927 of the proposed rules). The materiality test requires
institutions that have, on average, more than 10 percent of their
capital in ALL equity investments, to set aside much higher amounts of
capital on their non-CRA investments, such as venture funds, equities
and some convertible debt instruments. As drafted, this calculation
includes even CRA investments that are specifically held harmless from
the new capital charges. At the end of the day, it sets up unfair
competition between investments in “CEDES” and all other equity
investments for space in the “materiality bucket”. It also sets up an
unfair competition between CRA investments that are equity investments,
and those that are not (like mortgage-backed-securities and loan pools).
Having to include “CEDE” investments, with their very different
risk/reward profile, in the proposed “materiality” bucket of more
liquid, higher-yielding, more volatile equity exposures will have an
unintended chilling effect on the flow of equity capital to those in
need. Some insured depository institutions that meet the credit needs of
their communities with substantial investments in affordable housing tax
credits and/or Community Development Financial Institutions, currently
approach, or even exceed, the 10 percent cap just from CRA-qualified
investments alone.
While the proposed rule would grandfather these institutions’ current
levels of investment for 10 years, it also raises a red flag
discouraging comparable levels of equity investment in low- and
moderate-income communities going forward. If the test is adopted as
proposed, it will put pressure on depository institutions to minimize
investments in low yielding, less liquid CRA equity investments, to
avoid triggering the much higher capital charges on, and thus reducing
the profitability of, non-CRA equity investments. These higher capital
charges will double on publicly-traded equities, and triple or quadruple
on non-publicly traded ones.
We understand that the rules will initially apply only to the biggest
banks. Yet we believe it is fair to say that regulators expect that most
other insured depository institutions will comply, sooner or later, and
some banks will voluntarily comply immediately, as a matter of best
practices. It makes no sense to set up a conflict between the
profitability of non-CRA equity investments, and the level of CRA-qualified
equity investments. Depository institutions’ support for affordable
housing and community revitalization is well-established public policy
in the United States. Numerous, recent studies, including those
conducted by both the U.S. Treasury Department and the Federal Reserve
Board, document that programs supporting these goals have had
considerable positive impact on the nation’s low- and moderate-income
communities, with little or no risk to investors.
THE SOLUTIONS
First, it is important that the rules make clear that
“investments in CEDES” comprise all types of activities that are
eligible for bank investment under Part 24 as “Legislated Program Equity
Investments” that are held harmless from higher capital charges.
Second, the rules should exclude all CRA-related equity investments
that qualify under the Part 24 regulations from the materiality test
calculation. Third, the proposal that SBIC investments receive
only a “Partial Exclusion” from higher capital charges should not be
expanded to include any other CRA-related equity investments. Fourth,
the ANPR proposes a “cliff effect”, whereby if total equity investments
and/or SBIC ones exceed 10% of capital, all of the non-CRA and SBIC
equity investments then require higher capital. We suggest that only the
additional equity investments above the 10% level should require more
capital.
These suggestions are intended to prevent disrupting an important
marketplace serving accepted U.S. public policy goals, and also to
preserve a depository institution’s flexibility to respond to the credit
needs of its community without regard to the form of that response. We
stand ready to meet with you or provide you with additional information
and any form of assistance that will be useful in deliberations on these
rule proposals.
Sincerely yours,
Judith A. Kennedy
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