Buck Broken, FHLBs Faced with Decision

By Steven Sloan


The Federal Home Loan Bank of Seattle has become the first bank in the 76-year history of the system to run out of retained earnings, triggering what once was an unthinkable scenario by “breaking the buck.” The depletion of the retained earnings fund, which totaled $162.3 million on Sept. 30, puts the value of member capital at the Seattle Home Loan bank at risk. It also forces its 380 members in eight states to make a tough decision: write down the value of their stock investment or ride out the troubles at the Seattle Home Loan bank and hope shares regain their $100 par value. Financial institutions do not appear to have a road map on how to proceed. “All but one or two of the Home Loan banks are showing significant signs of stress because they hold such significant positions in private-label mortgage-backed securities,” said Karen Shaw Petrou, the managing director of Federal Financial Analytics Inc.