The Federal Housing Finance Agency (FHFA) on Monday published an invitation for comments on a proposed rule governing the merger of Federal Home Loan Banks (FHLBanks or Banks). The new regulations will implement amendments to the Federal Home Loan Bank Act made under the Housing and Economic Recovery Act of 2008 (HERA).
There are currently 12 FHLBanks which function as cooperatives. Only members, usually a federally insured depository institution or a state regulated insurance company, can own stock in the Bank and only members and some housing associates such as state housing agencies can access secured loans or advances from it. Each bank, while overseen by FHFA, is essentially autonomous with its own board of directors. During the recent economic disruption several of the Banks encountered severe financial problems and this was probably the impetus that prompted the amendments under HERA to permit two or more Banks to voluntarily merge.
The proposed rule would establish the conditions and procedures for the consideration and approval of such voluntary mergers and does not relate to liquidations, reorganizations, conservatorships or receiverships. As directed by The Safety and Soundness Act as amended by HERA, the Director of FHFA took into consideration in developing the rules the essential differences between Banks and the Government Sponsored Enterprises (GSEs) such as the Banks' cooperative ownership structure, its mission of providing liquidity to its members, its capital structure, joint and several liability, and its affordable housing and community development mission. The Director also took into account common governance practices, disclosure practices required by government securities laws, and approval standards required for mergers of insured depository institutions.
The rule is designed to take into account voluntary mergers between two or more banks (Constituent Banks) but also other conceivable business combinations such as consolidation, purchase and acquisition, or a combination of two or more Banks into one or more resulting banks.
The new rule sets out procedures for Constituent Banks to follow in procuring regulatory approval for any merger. It requires that each Bank obtain approval of its Board of Directors for the merger and that each Bank jointly file a merger application with FHFA which includes the following:
- Reasons for the merger and its possible effects on the constituent Banks and their members;
- Description of all proposed material operational changes including staff, combining of operations, and proposed organizational structure.
- Information on compliance with capital requirements
- Proposed by-laws and plans for the capital structure of the resultant organization or Continuing Bank;
The FHFA Director will determine whether to give preliminary approval to a merger based on a consideration of the financial and managerial resources of the Constituent Banks, their future prospects, and the effect of the merger on the safety and soundness of the Continuing Bank and the Bank System.
Once the Director has granted preliminary approval to the merger it must be ratified by the members of each constituent bank. The proposed rule sets out the parameters for this ratification and for final approval by the Director who must approve the merger unless the member vote was not appropriately conducted, the Banks have failed to fulfill any contingencies in the preliminary approval, or an event has occurred since the time of the preliminary approval that would have a significant adverse impact on the viability of the Continuing Bank.
Interested parties have 60 days to comment on the proposed rule which can be read in its entirety at http://www.fhfa.gov/webfiles/19513/FHLBVolMergFR112210.pdf.
