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HOUSING VERMONT
30 October 2003
Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Attention: Comments
Dear Mr. Feldman:
Housing Vermont appreciates the opportunity to comment on the
proposed Risk-Based Capital Rules, commonly known as the Basel
Proposals.
By way of introduction, Housing Vermont is a state wide non-profit
development company that works to develop safe, decent, and affordable
housing in partnership with local non-profit housing groups and
municipalities. We have developed over 3,000 units across Vermont and
most of those units have been developed with the equity raised from
local Vermont banks through the syndication of Low Income Housing Tax
Credits (LIHTC).
We are concerned about a potential unintended consequence of the
proposed rules that could affect adversely the amount of equity capital
Vermont banks invest in affordable housing. The proposal appears to be
in conflict with 12 CFR part 24, the regulation governing investments
that are designed primarily to promote the public welfare.
The Good News
The vital role of such LIHTC investments in the U.S. is clearly
recognized in part of the proposals. It is apparent that U.S. bank
regulators, working with those of other nations, negotiated a special
rule for "Legislated Program Equity Exposures." This section wisely
preserves the current capital charge on most equity investments made
under legislated programs, "recognizing this more favorable risk/return
structure and the importance of these investments to promoting public
welfare goals." Insured depository institutions investing as a result of
such programs therefore would set aside, by and large, the same amount
of capital for CRA equity investments under the new rules as they do now
- about $8.00 for every $100 of capital invested.
Given that CRA investments in affordable housing and community and
economic development all have a different risk/return profile than other
equity investments, that treatment is very appropriate. Based on
experience to date - and in the U.S. there is considerable experience -
CRA equity investments may well provide lower yields than other equity
investments. They also have much lower default rates and volatility of
returns than other equity investments. For example, Ernst and Young
reported in 2002 that the loss experienced from housing tax credit
properties was only .14% over the period 1987-2000, and .01 % on an
annualized basis. It is important that the final regulations make
clear that all equity investments eligible for CRA credit under Part 24
are, "Legislated Program Equity investments" that are held harmless from
higher capital charges.
THE PROBLEM
The "materiality" test of the proposed rules is of great concern (cf
page 45927 of the proposed rules). The materiality test requires
institutions that have, on average, more than 10 percent of their
capital in ALL equity investments, to set aside much higher
amounts of capital on their non-CRA investments, such as venture funds,
equities and some convertible debt instruments. As drafted, this
calculation includes even CRA investments that are specifically held
harmless from the new capital charges.
At the end of the day, it sets up unfair competition between CRA
equity investments and all other equity investments for space in the
"materiality bucket". It also sets up an unfair competition between CRAA
investments that are equity investments, and those that are not (like
mortgage backed securities and loan pools).
Having to include CRA equity investments, with their very different
risk/reward profile, in the proposed "materiality" bucket of more
liquid, higher-yielding, more volatile equity exposures will have an
unintended chilling effect on the flow of equity capital to those in
need. Some insured depository institutions that meet the credit needs of
their communities with substantial investments in affordable housing tax
credits and/or Community Development Financial Institutions, currently
approach, or even exceed, the 10 percent threshold just from CRA-qualified
investments alone. While the proposed rule would grandfather these
institutions' current levels of investment for 10 years, it also raises
a red flag discouraging comparable levels of equity investment in
low-and moderate income communities going forward. If the test is
adopted as proposed, it will put pressure on depository institutions to
minimize investments in low yielding, less liquid CRA equity
investments, to avoid triggering the much higher capital charges on, and
thus reducing the profitability of, non-CRA equity investments. These
higher capital charges will double on publicly traded equities, and
triple or quadruple on non-publicly traded ones.
We understand that the rules will initially apply only to the biggest
banks. Yet we believe it is fair to say that regulators expect that most
other insured depository institutions will comply, sooner or later, and
some banks will voluntarily comply immediately, as a matter of best
practices. It makes no sense to set up a conflict between the
profitability of non-CRA equity investments, and the level of CRA-qualified
equity investments.
Depository institutions' support for affordable housing and community
revitalization is well established public policy in the United States.
Numerous, recent studies, including those conducted by both the U.S.
Treasury Department and the Federal Reserve Board, document that
programs supporting these goals have had considerable positive impact on
the nation's low- and moderate income communities, with little or no
risk to investors.
THE SOLUTION
Housing Vermont respectfully submits that the proposed rules should
exclude all CRA-related investments that qualify under the Part 24
regulations from the materiality test calculation. Doing so would avoid
disrupting an important marketplace serving accepted U.S. public policy
goals. It will also preserve depository institutions' flexibility to
respond to the credit needs of its community without regard to the form
of that response.
Thank you for your consideration. Please let me know if you require
additional information and any form of assistance that will be useful
in deliberations on these rule proposals.
Sincerely yours,
R. Andrew Broderick
President
Housing Vermont
123 St. Paul Street
Burlington, VT 05401
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