FMCG analyzed the potential cost implications of the proposal and presents its findings in three categories: A. Bank Compliance Costs of SEC registration B. Liquidity Costs of SEC registration C. Bank Funding Costs of SEC registration. FMCG.сом em_FFHS 01_09-252 3 Executive Summary FMCG estimates the following potential costs related to SEC A. Compliance. Incremental compliance costs are not likely to be material compared to the B. Liquidity: FHLB System liquidity. The increased possibility of a disruption in debt issuance creates a real cost via the need to hold a permanently higher level of liquidity in the System. The precise cost of this additional liquidity depends both on the potential duration of any issuance or funding cost disruption and the source of the additional liquidity. At the extremes, the permanent per annum costs range from $109mm to $727mm. FMCG's most likely estimate is an ongoing extra cost of between $300mm and $500mm per annum or a permanent 4-7 bp increase in the funding cost of the System Member liquidity. Should the FHLB System become more exposed to funding disruptions (as could be more likely with SEC registration), prudent Member institutions would eventually change their liquidity management strategy to lower their reliance on FHLB System liquidity. Should Members respond to a perceived need to diversify their sources of liquidity by, say, substituting 20% of their current, unused borrowing capacity at FHLBS with Treasury bonds (which would be used to access the Fed discount window), Member institutions would, collectively, see their own liquidity management costs increase by $500mm per annum. FMCG.COM em_FFHS 01_09-252 continued 1 C. Funding. SEC registration may have adverse effects on the market perception of the 1 Government-Sponsored Enterprise 2 The lifetime cost is defined as the total increase in funding cost over the contractual term to maturity or the term to earliest call date 5 Most of the costs of SEC registration are likely to be "passed through❞ to homeowners: • The FHLBS are unlikely to absorb the costs of SEC registration given their already modest earnings • Members would also have limited incentives to absorb incremental liquidity costs they would incur, especially at this point in the economic cycle. 1 ROES for FHLBs range from 4% to 9%. This is substantially lower than the 15-20% ROE expectation at well-performing Member banks FMCG.сом em_FFHS 01_09-252 6 A. Compliance SEC registration brings along incremental compliance costs in the range of $5-$9mm/year. These incremental costs, which are largely administrative and legal in nature, are expected to be relatively small given that the FHLBS are already: Regularly audited by external audit firms • In compliance with the FHFB reporting requirements, which are generally consistent with the requirements of the SEC in form and content. Note: FMCG's estimates do not include intangible costs such as additional burden on the executive management time, diminished focus on those disclosures that are of most interest to the Members, etc. 1 Code of Federal Regulations, 12 CFR 985.6(b)(1). 12 CFR 989.4 Ranges reflect estimates by FMCG, FHLB, and Grant Thornton study: "Going public. Cost components do not include SEC registration fees since such fees are not applicable under the provisions of section 12(g) of the FMCG.сом em_FFHS 01-09-252 |