June 4, 2008
Mr. Robert E. Feldman
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
I write regarding the Federal Deposit Insurance Corporation (FDIC)
solicitation of comments on the treatment of secured liabilities for
Mechanics Cooperative Bank is deeply concerned that secured liabilities
would include FHLBank advances. In addition, factoring advances into the
assessment rate or base, or capping advances to members, would be contrary
to good public policy and counterproductive to the interests of the FDIC.
The FDICs charging higher assessments for secured liabilities would pose a
harsh penalty for us and provide a strong disincentive for use of advances
as a funding source. Our FHLBank advances would be subject to higher
assessments regardless of their risk profile. The degree to which we would
be penalized for FHLBank membership would depend on the levels of advance
utilization by our institution and whatever formula was adopted in a final
The appropriate manner to assess deposit insurance premiums is to base rates
on a banks actual risk profile. There is no empirical evidence that
advances add to an institutions risk. Banks that are engaged in excessively
risky activities should pay a higher premium regardless of whether those
activities are financed by deposits, FHLBank advances, or alternative
wholesale funding sources. The professional and capable examination staff of
the supervisory agencies is best suited to determining a banks risk
profile, rather than an inflexible formula imposed on all insured
institutions, regardless of circumstance.
Discouraging borrowing from the FHLBanks
could lead to the perverse effect of increasing risk among FHLBank members.
Borrowers frequently use FHLBank advances for liquidity purposes and to
manage interest-rate risk, as well as funding loan growth. In many markets,
the supply of deposit funds is inadequate to meet loan demand and prudent
financial management needs. Curtailing the use of FHLBank advances would
force banks to look to alternative, typically costlier wholesale funding
sources that are often volatile, thereby reducing profitability and
increasing liquidity risk.
Penalizing use of advances also would conflict with the intent of Congress
in establishing the FHLBanks, opening membership to commercial banks, and
more recently, in adopting the Gramm-Leach-Bliley Act, which expanded small
banks access to advances. The FHLBanks very mission is to provide
financial institutions with access to low-cost funding so they may
adequately meet communities needs for credit to support homeownership and
community development. Charging higher assessments to those banks utilizing
advances would, in effect, use the regulatory process to impede the FHLBanks
mission as established and reaffirmed by Congress.
Finally, a regulatory and legal structure is already in place to ensure
collaboration between the FDIC and FHLBanks. If an FDIC-insured institution
is experiencing financial difficulties, the FDIC and FHLBanks are required
by regulation to engage in a dialogue to ensure the institution has adequate
liquidity while minimizing other risks, including losses to the FDIC. In
addition, the FHLBanks are provided the legal authority for confidential
access to exam reports to assist with this analysis.
The partnership between the FHLBanks and member financial institutions
envisioned by Congress when they created the FHLBanks in 1932 has worked
remarkably well. FHLBank membership allows countless banks throughout the
nation to remain competitive, serves as a critical source of credit for
housing and community development purposes, and supports sound financial
management. Penalizing financial institutions for their partnership with the
FHLBanks would result in them being less competitive, limit credit available
in the communities they serve, and limit their use of a valuable liquidity
source, all for no justifiable economic or public policy reason.
Joseph T. Baptista Jr.
President and Chief Executive Officer
Mechanics Cooperative Bank
308 Bay Street
P.O. Box 552
Taunton, MA 02780