Enough is Too Much

After the welcome diversions of the last two posts, I’m back to the issue at hand – estimating what resources the FHLBs can apply towards affordable housing initiatives.

After the Banks are done counting their profits for the year, they decide what to do with them – but they only have two choices: pay dividends or add to retained earnings (their own savings account).

Dividends are the fun part – lots of smiles and a sense of accomplishment – but as I’ve shown, you can only pay so much in dividends.  At current levels, after including the hefty dividends, member institutions can borrow from the FHLBs at about the same rates the US Treasury borrows.  That is the best deal in town, and you can’t do better than the best.  So, a cap on dividends has been suggested.

The balance of the profits goes to retained earnings.  A more passive route akin to saying, ‘we have this money, but we don’t know what to do with it, so we’ll just save it’.  That’s not very creative.  This dilemma has confronted the FHLBs for years – and the result: a massive accumulation of retained earnings (aka, money they don’t know how to deploy) as shown previously.

To be fair, some level of retained earnings is required to cover risk exposure.  Each FHLB calculates their aggregate risk exposures and makes sure it has sufficient retained earnings to cover these potential losses.  The FHFA has a similar measurement process, the basis of the regulatory Risk Based Capital Requirement (RBC).

At year end 2023, the RBC requirement was about $14 billion, and accumulated retained earnings had amassed to $28 billion with a $3 billion add in 2023 alone, that is two times that required for risk.

Adding to retained earnings is okay – but without limit?

Rather, as I have suggested limits on dividends, I now propose that until such time the FHLBs develop strategies to meaningfully develop mission consistent ways to deploy retained earnings (which I’m hoping will happen soon), they should at least stop adding to them.  Enough is enough.  

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