Seattle Federal Home Loan Bank (FHLB) president and CEO Richard Riccobono on Monday distributed a letter to its members acknowledging the bank will likely report a failure to meet risk-based capital minimums as of Dec. 31. The overall tone of the memo was one of regret, as Riccobono wrote he believes the way risk-based capital is currently calculated “significantly overstates our market risk,” given the state of the financial market and the bank’s nearly $2.8 billion in permanent capital. “[The] ongoing turmoil in the capital and mortgage markets has caused a decline in the market value of the Seattle Bank’s private-label mortgage-backed securities, significantly beyond any expected actual loss,” he said. “Unfortunately, the risk-based capital rules … rely on market value rather than expected loss as the measure for determining our risk-based capital requirement.” Federal regulations prevent any FHLB that fails to meet capital requirements from declaring a dividend or redeeming (repurchasing) capital stock. Riccobono in his letter reminded members that the Seattle bank remains in compliance with all other regulatory capital requirements, “specifically our capital-to-assets ratio and our leverage capital ratio,” and that its risk-based capital requirement — calculated on a monthly basis — may soon return to compliance without affecting the bank’s balance sheet or capital position. But the bank president still has his “concerns regarding the current risk-based capital methodology,” which he said he has communicated to the bank’s regulator. “In our opinion, the Seattle Bank … has more than enough capital to cover the risks reflected in the bank’s balance sheet,” Riccobono said. “While the market values of mortgage-based assets are currently under extraordinary pressure, the vast majority of the private-label mortgage-backed securities that we hold are highly rated, credit-enhanced, adjustable-rate securities that we have the ability and intent to hold until they mature.” It was unclear at this time whether the deficiency will likely drive write-downs in FHLB stock in member banks, or whether the Seattle bank will require government assistance going forward. Representatives of FHLB Seattle could not be reached for comment and would not return inquiries  before this story was published. Write to Diana Golobay at diana.golobay@housingwire.com.

More: