By Noah Buhayar | Bloomberg
US banking regulators confronted an unusually large penalty when they seized Silicon Valley Bank last year: $285 million in fees to prematurely wind down emergency financing from the Federal Home Loan Bank system.
That was the price tag to retire billions in financing that the firm obtained in a last-ditch attempt to survive a run on deposits, according to an internal Federal Deposit Insurance Corp. document obtained by Bloomberg.
The fee, which hasn’t been previously reported, was the largest of its kind for any bank failure since before the 2008 financial crisis, the document shows.
Also see: Silicon Valley Bank collapse: A one-off calamity or sign of more trouble for California?
The ability of FHLBs to generate fees on emergency lending, even when borrowers fail, is sure to stoke the debate in Washington over how to reform the Depression-era system designed to help finance mortgage lending.
In November, the Federal Housing Finance Agency, which oversees home-loan banks, said it planned to study prepayment fees and potentially change rules. The regulator aims to ensure such institutions have an incentive “to improve their due diligence” before ramping up financing — known as advances — to struggling members.
To be sure, FHLBs incur costs when retiring the debt, and the fees they’re allowed to charge are approved by their regulator. The idea is to let the institutions recoup those expenses so that they remain financially indifferent to prepayments.
Related: Will Silicon Valley, Signature bank crashes send mortgage rates plummeting?
Such fees “are disclosed to all interested parties, are generally equal to the cost of unwinding the hedged transaction, and are in keeping with safe and sound banking practices,” said Ryan Donovan, chief executive officer of the Council of Federal Home Loan Banks, a trade group.
As SVB teetered on the edge of collapse last year, the FHLB of San Francisco quickly ramped up its…
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