banks were more diversified, but many community banks have been caught in the squeeze, leading some to have to place a negative value on their tangible assets. The banks may be perfectly sound, but the tangible asset calculation makes them look like they are in trouble. Viewed one way, the tangible capital rule is doing what it is supposed to do: ensure that banks with dodgy financials don’t get access to FHLB financing. But as the current situation makes clear, tangible assets may not be the best way to evaluate banks in the current economic climate. About a decade ago, regulators such as the Fed and the FDIC adopted new rules that used Tier 1 Capital as the primary measure of soundness, but the FHLB continued to use tangible capital. Both methods offer a snapshot of a bank’s condition. But Tier 1 capital casts a wider net and, according to the financial organizations, provides a better reflection of actual conditions. In addition, using Tier 1 would likely alleviate the liquidity crisis for affected banks. How the Federal Housing Finance Agency (FHFA), the FHLB's regulatory agency, will respond remains to be seen. The FHFA could temporarily waive the rule, change it, or leave things the way they are. Meanwhile, a growing cross-section of community banks wait anxiously to see if they will continue to have access to FHLB financing. w Dedicated to serving the needs of community banks, PCBB’s comprehensive and robust set of solutions includes cash management, international services, lending solutions, and risk management advisory services. To continue this discussion, or for more information, please contact Jay Kenney at jkenney@pcbb.com. 7 AZBANKERS.ORG
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