Quarter of U.S. banks hold GSE preferred stock--ABA

WASHINGTON, Sept 22 (Reuters) - About one-quarter of U.S. banks hold preferred stock of Fannie Mae and Freddie Mac, leaving more banks than previously thought facing write-downs and needing added capital, a banking trade group said on Monday.

Earlier this month, the U.S. government placed the mortgage finance companies, also known as government-sponsored enterprises (GSE), in conservatorship, wiping out common and preferred stockholders. As a result, banks that own the shares will have to write down their holdings.

The move could lower regulatory capital ratings of several banks and even subject them to a precarious situation called “prompt corrective action” (PCA).

PCA requires banks to come up with a restoration plan within 45 days of being designated below “adequately capitalized.”

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.

Regulators, willing to provide some flexibility, initially said a “limited” number of smaller banks hold “significant” common or preferred shares in the two companies.

“The negative impact on banks -- particularly Main Street community banks -- is far greater than the regulators first thought,” American Bankers Association President Edward Yingling said in a letter to Treasury Secretary Henry Paulson and other banking regulators.

In the letter, Yingling said the elimination of the stock dividends is reducing bank capital, which limits banks’ ability to make new loans and renew existing ones.

The letter, which was also sent to the Federal Reserve, Office of the Comptroller of the Currency, Office of Thrift Supervision and Federal Deposit Insurance Corp, is similar to a letter sent more than a week ago by the Independent Community Bankers Association.

An industry survey found that nearly 27 percent of banks hold preferred stocks, compared to early estimates by banking regulators that only a few dozen banks would be affected by the takeover, Yingling said.

About 3.4 percent of banks hold auction-rate securities backed by the preferred stock, he said.


Including exposures at large banks, the industry is holding between $10 billion and $15 billion related to the mortgage companies, Yingling added. About 85 percent of banks have exposure of less than 20 percent of equity capital.

The largest number of banks with GSE preferred stock exposure is in Massachusetts, Yingling said in the letter, followed by banks in Illinois, Connecticut, South Carolina and Virginia.

The trade group asked that regulators restore dividend payments until after the end of the third quarter to allow for Congress and regulators to address solutions.

Yingling also asked for some flexibility on tax issues for losses related to the stocks.

A bank facing prompt corrective action will not necessarily be placed on the FDIC’s “problem list,” 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 list could potentially put more pressure on the agency's Deposit Insurance Fund, which has been hit with 12 failed banks this year, including California-based mortgage lender IndyMac Bancorp Inc IDMC.PK.

Industry and regulators are bracing for more bank failures.

The FDIC oversees an industry-funded reserve, which stood at about $45 billion at the end of June, used to insure up to $100,000 per account per depositor and $250,000 per Individual Retirement Account at insured banks. (Reporting by John Poirier; Editing by Tom Hals)