What is ‘Resolution Funding Corporation – REFCORP’

Resolution Funding Corporation (REFCORP, occasionally styled as RefCorp) is a government-sponsored corporation that was created by the United States Congress to fund the Resolution Trust Corporation (RTC), the federally-owned asset management company that was established to bail out savings and loan, or S&L, institutions that had failed during the Savings and Loan Crisis of of the late 1980s and early 1990s.

REFCORP provided liquidity to these organizations by issuing bonds, and also helped administer some of the struggling S&Ls. Both REFCORP and RTC were established as part of the Financial Institutions Reform, Recovery and Enforcement Act of 1989.

BREAKING DOWN ‘Resolution Funding Corporation – REFCORP’

REFCORP, a 501(c)(1) organization, was a crucial mechanism to help RTC liquidate or prop up savings and loans during the crisis, which began in the late 1970s and lasted through the first half of the ’90s.

By participating in risky activities such as commercial real estate lending and investing in junk bonds, S&Ls had incurred big financial losses, but because their deposits were insured by the Federal Savings and Loan Insurance Corporation, or FSLIC, which eventually became insolvent, the U.S. government was forced to leverage massive taxpayer money to resolve the crisis.

REFCORP bonds were issued from 1989 to 1991. Over the course of more than six years, they helped RTC liquidate, bail out or otherwise resolve the cases of some 747 insolvent S&Ls, or thrift institutions, to the tune of nearly $500 billion.

REFCORP’s current status and legacy

In 1997, more than a decade after the end of the S&L crisis, Resolution Funding Corporation still had outstanding debt of about $30 billion. By 2011, the Federal Housing Finance Agency, or FHFA, determined that the Federal Home Loan Banks, which since 1999 had been required to pay 20 percent of their profits (after payments to the Affordable Housing Program) toward bond repayments, had fulfilled their statutory requirements to pay the interest due on REFCORP bonds.

FHFA also announced a new capital plan for 11 of the dozen Federal Home Loan Banks nationwide, obligating them to allocate funds that had previously been applied to interest on the REFCORP bonds to new restricted retained earnings accounts. The aim, according to FHFA is to bolster the banks’ retained earnings and capital.

Following the fulfillment of their obligations to REFCORP, the banks agreed to save 20 percent of their net income to restricted retained earnings accounts, until the accounts equaled 1 percent of their own outstanding consolidated obligations.

“FHFA strongly supports the Banks’ collaboration in developing this Joint Agreement, which enhances their capital and the safety and soundness of the Federal Home Loan Bank System,” said FHFA’s then Acting Director Ed DeMarco at the time.

“The approach taken by the banks reflects the longstanding practice and requirements pre-REFCORP of directing at least 20 percent of earnings to building retained earnings,” he explained. “The Banks’ cooperative approach to establishing and building restricted retained earnings accounts will enhance the System’s safety and soundness and is an appropriate action in view of the Banks’ joint and several obligation to pay System debt obligations.”

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