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On Sept. 15, as bad news gave Wall Street a triple-whammy sucker punch, the 12 Federal Home Loan Banks (FHLBs) restricted their lending to member banks for the day, something they hadn’t done since the twin towers of the World Trade Center were falling in flames.

The move was one indication of the shock dealt to the financial system by the bankruptcy filing of Lehman Bros. Holdings Inc., Bank of America Corp.’s takeover of Merrill Lynch & Co. Inc. and American International Group Inc.’s request for a federal bailout.

“That (restriction) was really done out of an abundance of caution,” said Michael Wilson, executive vice president and chief business officer of Federal Home Loan Bank of Des Moines. The temporary measure may have strengthened a perception by bankers, however, that the FHLB system has tightened its criteria for extending advances, which Wilson said is not the case.

“I think there is a perception by some of our bank members and some of our banking regulators that we have changed our practices, but we have not,” he said. “There is just more attention to everything.”

Formed during the Great Depression to ensure liquidity for the U.S. banking industry, the government-sponsored enterprises have the implicit backing of the U.S. Treasury. Their member-shareholders include commercial banks, savings institutions, credit unions and insurance companies.

Though advances by the FHLB of Des Moines are at an all-time high, there is no indication that the increase is being driven by regulators requiring institutions to increase their borrowings from the wholesale bank to boost their liquidity, Wilson said.

Attractive rates

“We have the sense that (member institutions) are borrowing because rates are attractive, and just basically (because of) strong fundamentals for the member banks in our five-state district,” he said.

As of June 30, advances totaled $46 billion, compared with $40.4 billion as of Dec. 31, 2007. The bank reported net income of $47.9 million in the second quarter, compared with $23.1 million for the second quarter of 2007.

In a letter to its members dated Sept. 9 and posted on its Web site, the FHLB of Des Moines addressed concerns by bankers about their ability to tap into advances if needed.

“Those concerns were not well focused,” said Wilson, who signed the letter. “A lot of those were being generated by questions from their regulators: ‘Can you rely on the Federal Home Loan Bank?’ ‘Do you know what their lending practices are?'” The letter is merely an outline of existing lending practices and policies, which haven’t been changed, he said.

In the letter, Wilson said the bank has “reduced the borrowing capacities of a small number of members,” but that it has not required early repayment of any advances from those members.

“The fact is that the FHLB Des Moines does not make arbitrary and capricious credit and collateral decisions,” Wilson wrote. “The bank’s decision to grant, renew, limit or deny the extension of advances, and the terms and conditions of any such credit, are based on the bank’s sole determination of the member’s creditworthiness.”

Wilson cited statistics that indicate 99.2 percent of its members have a borrowing capacity of 20 percent or more of assets, with its strongest members able to borrow up to 40 percent of assets.

The bank is, however, assessing its collateral maintenance levels, referred to in the industry as “haircuts,” and said it expects to announce any planned changes for 2009 in November.

Wells Fargo Bank is currently FHLB of Des Moines’ single largest borrower, with $12 billion in advances as of June 30, or 26.3 percent of the bank’s advances. Aviva Life & Annuity and ING USA Annuity and Life Insurance Co., the bank’s third- and fourth-largest borrowers, held 5.4 percent and 4.5 percent of advances as of June 30.

In distress

As it entered the third quarter, the U.S. banking industry faced a challenging environment marked by loan-loss provisions that have increased more than fourfold from a year ago and double the percentage of unprofitable institutions. In the quarter that ended June 30, federally insured institutions reported total net income of $5 billion, an 87 percent decrease from the second quarter of 2007 and the second-lowest recorded since 1991. Overall, nearly 18 percent of Federal Deposit Insurance Corp.-insured institutions were unprofitable in the second quarter, compared with 9.8 percent in the same quarter of 2007.

In Iowa, 13 of the 325 state-chartered institutions (4 percent) were unprofitable in the second quarter of 2008, while two of the 19 federally chartered institutions were unprofitable. Among banks with operations in Greater Des Moines, eight recorded losses last quarter, compared with two a year ago. (See chart on page 4.)

Mark Degner, president and CEO of Community State Bank in Ankeny, said he believes Iowa banks are largely insulated from the more severe impacts the financial markets are experiencing on the coasts. “Iowa was somewhat protected during the housing bust,” he said. “I think you’ll see Iowa banks somewhat protected during this downturn.”

Degner, who said his impression was that the Federal Home Loan Bank had tightened its lending standards, agreed that credit has become more difficult to obtain throughout the state.

“Whether that will continue to tighten will depend on each individual bank,” he said. “I think each bank has to determine what they’re comfortable with and stick with that.” Community State Bank is “looking at things differently than we did a couple of years ago, and I think everyone is.”

As for business lending, “banks are asking more questions than they used to,” he said, “but a good, strong, successful company won’t have any trouble borrowing money.”