October 30, 2003
National Association of State & Local Equity Funds
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 State and Local Equity Funds (NASLEF)
appreciate the opportunity to comment on the proposed Risk-Based Capital
Rules, commonly known as the Basel proposals.
By way of introduction, NASLEF represents over 20 State and Local Low
Income Tax Credit equity funds that have collectively raised and placed
over $3.5 billion in tax credit equity in support of much needed
affordable housing. Our mission is to increase and enhance investment in
low- and moderate income housing.
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, 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 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 capital invested.
Given that CRA investments in affordable housing and community and
economic development all have a different risk/return profile than any
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 any other investments. For example, Ernst and Young
reported in 2002 that the loss experienced from housing tax credit
properties was only .14% over the period of 1957-2000, and .01% on an
annualized basis. It is important that the final regulations make clear
that all equity investments eligible for CRA credit under Part 24 are
"Legislated Program Equity Investments" that are held harmless from
higher capital charges."
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 CRA
equity investments 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 CRA equity investments, with their very different
risk/reward profile, in the proposed ``materiality" bucket of more
liquid, high-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 threshold 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 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.
NASLEF respectfully submits that the proposed rules should exclude
all CRA-related investments that qualify under the Part 24 regulations
from the materiality test calculation. Doing so would avoid disrupting
an important marketplace from serving accepted U.S. public policy goals.
It will also preserve depository institutions' 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,
Bernard T. Deasy
President
National Association of State and Local Equity Funds
C/o Merritt Community Capital Corporation
1736 Franklin Street, Suite 600
Oakland, CA 94612
