Community banks seek help on Fannie, Freddie stock

WASHINGTON, Sept 17 - A banking trade group urged regulators to show some flexibility when considering capital requirements for community banks facing write-downs from holding the preferred stock of Fannie Mae and Freddie Mac, according to a letter made public on Wednesday.

On Sept. 7, the U.S. government placed mortgage finance companies Fannie Mae and Freddie Mac in conservatorship, wiping out common and preferred stockholders.

The move could lower regulatory capital ratings of several banks and even subject them to a precarious situation called "prompt corrective action," requiring them to come up with a restoration plan within 45 days of being designated below "adequately capitalized," according to the letter written to U.S. banking regulators by the Independent Community Bankers Association.

That, in addition to other financial problems and managerial or operational weaknesses could land a bank on the troubled list with the Federal Deposit Insurance Corp.

In the letter, which was dated Friday, Sept. 12, the ICBA asked the heads of the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Office of Thrift Supervision to give small banks more time to restore their capital levels.

"ICBA strongly urges the banking agencies to use maximum flexibility when considering capital restoration," ICBA President Camden Fine said in the letter.

"Since community banks have limited options to raise capital in the capital markets, they may need time to adjust their balance sheets to come back into capital compliance," Fine said.

NEW SPIN ON 'SAFE ASSETS'

Fine said community banks bought preferred stock of Fannie and Freddie, the government-sponsored enterprises and publicly traded companies that own or guarantee about half of the outstanding U.S. home mortgage loans, based on recommendations by regulatory examiners and outside accounting firms who said they were safe assets for diversification.

In a joint statement the day of the Fannie Mae and Freddie Mac takeover, the regulatory agencies expressed a degree of flexibility but did not specify, saying they "are prepared to work with these institutions to develop capital-restoration plans pursuant to the capital regulations and the prompt corrective action."

A bank facing "prompt corrective action" will not necessarily be placed on the FDIC's "problem list," according to banking experts. But it could spell trouble for some that would lead to being put onto the list.

A flood of banks being placed on the FDIC's "problem list," though, could potentially put more pressure on the agency's Deposit Insurance Fund, which has been hit with 11 failed banks this year, including California-based mortgage lender IndyMac Bancorp Inc.

More bank failures are expected.

The FDIC oversees an industry-funded reserve, which currently stands at about $45 billion, used to insure up to $100,000 per account per depositor and $250,000 per Individual Retirement Account at insured banks.