[Federal Register Volume 61, Number 211 (Wednesday, October 30, 1996)]
[Rules and Regulations]
[Pages 55877-55881]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-27817]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 934

[No. 96-71]


Amendment of Budgets Regulation

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending 
its regulation governing approval of Federal Home Loan Bank (FHLBank) 
budgets by removing the requirement that the FHLBanks' budgets be 
approved by the Finance Board. In order to ensure sufficient data to 
carry out its

[[Page 55878]]

supervisory responsibility to ensure the safety and soundness of 
FHLBank operations, the final rule establishes specific requirements 
for the FHLBanks' preparation and reporting of both budget and other 
financial information to the Finance Board. Certain of these reporting 
requirements are derived and streamlined from the Finance Board's 
current practice for budget and financial information reporting by the 
FHLBanks. The final rule is consistent with the Finance Board's 
continuing effort to devolve management and governance authority to the 
FHLBanks. It also is consistent with the goals of the Regulatory 
Reinvention Initiative of the National Performance Review.

EFFECTIVE DATE: The final rule is effective November 29, 1996.

FOR FURTHER INFORMATION CONTACT: John C. Waters, Office of Resource 
Management, (202) 408-2860, or Sharon B. Like, Senior Attorney-Advisor, 
Office of General Counsel, (202) 408-2930, Federal Housing Finance 
Board, 1777 F Street, N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

    The Federal Home Loan Bank Act (Bank Act), 12 U.S.C. 1421 to 1449, 
does not provide explicitly for Finance Board approval of Bank budgets. 
See id. section 1432(a). Such approval authority is derived from the 
Finance Board's general powers and duties to supervise the FHLBanks 
under sections 2A(a)(3) and 2B(a)(1) of the Bank Act, as well as the 
Finance Board's authority to approve corporate powers granted to the 
FHLBanks under section 12(a) of the Bank Act. See id. sections 
1422a(a)(3), 1422b(a)(1), 1432(a).
    Section 934.6 of the Finance Board's existing regulation provides:

    As prescribed by the [Finance] Board or its designee, each Bank 
shall prepare and submit to the Board for its approval a budget. 
Each Bank will operate within such budget as approved or as it may 
be amended by the Bank's board of directors within limits set by the 
Board. Any amendment beyond such limits must be submitted to the 
Board for approval. The Board's designee, may approve amendments 
within limits set by the Board.

See 12 CFR 934.6.
    The substance of Sec. 934.6 previously appeared at Sec. 524.6 of 
the regulations of the Finance Board's predecessor, the Federal Home 
Loan Bank Board (FHLBB). See 12 CFR 524.6 (1989). (redesignated). The 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 
(FIRREA), Pub. L. 101-73, 103 Stat. 183 (Aug. 9, 1989), amended the 
Bank Act by creating the Finance Board and transferring from the FHLBB 
to the Finance Board the responsibility for the supervision and 
regulation of the twelve FHLBanks. See 12 U.S.C. 1422a(a), 1422b(a)(1). 
Section 524.6 subsequently was redesignated as Sec. 934.6 of the 
Finance Board's regulations. See 54 FR 36757 (Sept. 5, 1989).
    In approving the FHLBanks' budgets under current Sec. 934.6, the 
Finance Board's practice, which is not codified in the regulation, has 
been to request from each FHLBank a report on the FHLBank's annual 
budgets approved by its board of directors, including the following 
information: projected balance sheet; projected income statement 
(including FHLBank board-approved operating expense budget and staffing 
levels); FHLBank board-approved capital expenditures budget; 
supplemental information as requested by the Finance Board; strategic/
business plan; organizational chart; FHLBank board-approved budget 
resolution; and management discussion of the FHLBank's expected 
financial performance and underlying assumptions and comparisons with 
the financial performance from the prior year.
    Pursuant to Sec. 934.6, the Finance Board approves each of the 
FHLBanks' operating expense and capital expenditures budgets. The 
Finance Board also approves amendments to FHLBank budgets that exceed 
previously approved limits.
    In addition, Finance Board practice has been to require each 
FHLBank to submit quarterly reports that evaluate year-to-date actual 
performance results relative to the budget projections as originally 
approved or amended, and reforecasted financial projections for the 
remainder of the year relative to the budget projections as originally 
approved or amended. Each FHLBank also submits an annual report that 
evaluates the actual performance results for the year relative to the 
budget projections as originally approved or amended.
    The Finance Board has been considering ways to transfer a variety 
of governance responsibilities it exercises to the FHLBanks since the 
completion of studies by the Congressional Budget Office, General 
Accounting Office, Department of Treasury, Department of the Housing 
and Urban Development, and Finance Board, which were required by the 
Housing and Community Development Act of 1992, Pub. L. 102-550, 106 
Stat. 3672 (Oct. 28, 1992). These studies recommended that the 
governance and regulatory responsibilities for the FHLBanks be 
separated, with the FHLBanks carrying out the management functions, and 
the Finance Board exercising regulatory oversight over the FHLBanks. 
The Finance Board already has taken actions to devolve other governance 
functions to the FHLBanks, including its recently adopted final rule 
transferring responsibility for all FHLBank membership approvals from 
the Finance Board to the FHLBanks. See 61 FR 42531 (Aug. 16, 1996) (to 
be codified at 12 CFR part 933).
    Approval of the FHLBanks' budgets is a management responsibility 
which the Finance Board believes is best administered by the FHLBanks' 
respective boards of directors. Therefore, the Finance Board approved 
for publication a proposed rule to amend the budgets regulation by 
eliminating the requirement that the Finance Board approve FHLBank 
budgets, while establishing reporting requirements for the FHLBanks in 
order to ensure that the Finance Board has sufficient information to 
carry out its supervisory responsibility. The notice of proposed 
rulemaking was published in the Federal Register on August 9, 1996, 
with a 30-day public comment period that closed on September 9, 1996. 
See 61 FR 41535 (Aug. 9, 1996).
    The Finance Board received a total of seven comment letters in 
response to the notice of proposed rulemaking. The commenters included 
five FHLBanks and two trade associations. All comment letters 
addressing the issue supported the elimination of Finance Board 
approval of FHLBank budgets. Generally, commenters viewed budget 
approval as a management responsibility best administered by the Banks' 
boards and the transfer of this responsibility as consistent with the 
Finance Board's devolvement of corporate governance authority.
    In addition, most commenters addressed one or both of the two 
issues in the proposed rule for which comments were specifically 
requested--Finance Board determination of a consistent interest rate 
scenario to be incorporated in FHLBank budgets and adoption of an 
efficiency standard in the rule. One commenter also presented views on 
establishing a threshold for budget amendments submitted to the Finance 
Board and on overall reporting requirements proposed by the Finance 
Board. Specific comments are discussed in Section II of the 
SUPPLEMENTARY INFORMATION.

II. Analysis of Public Comments and the Final Rule

    The final rule sets forth responsibilities and requirements for 
adoption of annual FHLBank budgets,

[[Page 55879]]

and reporting requirements for annual budgets, budget amendments, mid-
year reforecasted projections, and annual actual performance results.
    The following is a section-by-section analysis of the final rule.

A. Adoption of Annual FHLBank Budgets--Sec. 934.6(a)

    Section 934.6(a)(1) of the final rule provides that each FHLBank's 
board of directors shall be responsible for the adoption of an annual 
operating expense budget and a capital expenditures budget for the 
FHLBank, and any subsequent amendments thereto, consistent with the 
requirements of the Bank Act, Sec. 934.6, and other regulations and 
policies of the Finance Board. Finance Board approval of FHLBank 
operating expense and capital expenditures budgets will no longer be 
required. However, eliminating the requirement that the Finance Board 
approve FHLBank budgets will not preclude the Finance Board from 
continuing to require the reporting of FHLBank budgets and other 
financial information (as codified in this final rule), as part of its 
regulatory oversight responsibility. Furthermore, adoption of this 
final rule does not remove or modify the requirement in section 12(a) 
of the Bank Act that a FHLBank obtain the prior approval of the Finance 
Board before it may purchase or erect, or lease for a term of more than 
10 years, a building to house the FHLBank. See id. section 1432(a); 
Sec. 934.6(a)(2).
    Six commenters supported the transfer of budget approval authority 
to the FHLBank boards. Almost uniformly, the commenters agreed that 
budget approval is a management function most appropriately 
administered at the individual FHLBank level, and that the budget 
proposal is consistent with Finance Board efforts to devolve management 
responsibilities to the FHLBanks.
    The notice of proposed rulemaking specifically solicited comments 
on whether the final rule should include an efficiency standard to 
which FHLBank budgets should conform and, if so, what that standard 
should be. Four commenters strongly opposed the adoption of an 
efficiency standard. Commenters stated that no uniform efficiency 
measure could be set for the FHLBanks, given the diversity of their 
operations and operating philosophies. Two commenters noted that 
efficiency standards are already in place at the FHLBanks, where 
efficiency goals are required by stockholders, since inefficiency 
impacts net income and thus reduces dividend availability. Two FHLBanks 
also commented that a regulatory efficiency standard is not necessary 
because the Finance Board has sufficient supervisory authority to 
intervene if safety and soundness issues arise. It also was suggested 
that adopting such a standard would be inconsistent with the goal of 
separating the Finance Board's regulatory and governance 
responsibilities.
    After considering the comments received, the Finance Board has 
decided not to incorporate a specific efficiency standard into the 
final rule. The Finance Board concurs that, considering the diversity 
of the FHLBanks, their districts, and their members, it would be 
difficult to establish a uniform efficiency standard that would 
recognize these differences while fairly measuring individual FHLBank 
efficiency. However, Sec. 934.6(a)(1) of the final rule provides 
generally that, in adopting their budgets, the FHLBanks have a 
responsibility to protect both their members and the public interest by 
keeping their costs to an efficient and effective minimum.
    Section 934.6(a)(3) of the final rule provides that the board of 
directors of a FHLBank may not delegate the authority to approve the 
annual budgets, or any subsequent amendments thereto, to FHLBank 
officers or other FHLBank employees.
    Section 934.6(a)(4) of the final rule allows each FHLBank to 
determine the interest rate scenario it will use in preparing its 
annual budgets. This is a change from the current practice under which 
the Finance Board provides the interest rate scenario that the FHLBanks 
must use in preparing their budgets. The notice of proposed rulemaking 
specifically requested comments on whether an alternative approach for 
determining interest rate scenarios for FHLBank budgets, such as 
requiring the use of reported interest rates as of a fixed date 
specified in the regulation, would be preferable to the current 
approach. Six commenters addressed the issue. Comments focused on 
whether or not the Finance Board should determine interest rate 
scenarios for FHLBank budgets. One commenter supported Finance Board 
determination of a uniform interest rate scenario, believing that 
uniform interest rates for all FHLBanks would improve Finance Board 
monitoring capabilities, and would recognize potential risks of the 
FHLBank System's joint and several liability. Five FHLBanks opposed 
Finance Board determination of a uniform interest rate scenario. 
Commenters stated that interest rates set by the Finance Board 
generally lag behind the market, and budget procedures did not provide 
the Banks with enough flexibility to update their budgets based upon 
their own interest rate assumptions. One commenter raised the 
possibility that multiple budgets based on different interest rate 
scenarios, one established by the Finance Board and one by the FHLBank 
board, might need to be prepared. One commenter stated that involvement 
of the Finance Board in determining interest rates is inappropriate 
since it does not involve safety and soundness concerns.
    After considering the comments received, the Finance Board has 
decided to provide the FHLBanks with the flexibility to determine their 
own interest rate scenarios when preparing annual budgets. The Finance 
Board believes that providing each FHLBank with the flexibility to 
update interest rates as it deems appropriate throughout the budget 
preparation process will improve the meaningfulness of FHLBank budgets. 
The Finance Board further believes that the benefits gained from this 
added flexibility will more than compensate for the lack of a FHLBank 
System-wide uniform interest rate scenario. Each FHLBank, however, will 
be required to provide to the Finance Board its interest rate 
assumptions. See Sec. 934.6(b)(6).
    Section 934.6(a)(5) of the final rule provides that a FHLBank may 
not exceed its total annual operating expense budget or its total 
annual capital expenditures budget without prior approval by the 
FHLBank's board of directors of an amendment to such budget.

B. Budget Reports--Sec. 934.6(b)

    Section 934.6(b) of the final rule establishes specific FHLBank 
reporting requirements, certain of which are codified and streamlined 
from the Finance Board's current practice for FHLBank reporting.
    Specifically, the FHLBanks are required to submit to the Finance 
Board, by January 31 of each year, in accordance with reporting formats 
and as further prescribed by the Finance Board, such FHLBank budgets 
and other financial information as the Finance Board shall require, 
including the following: (1) Balance sheet projections; (2) income 
statement projections, including operating expense budget data and 
staffing levels; (3) capital expenditures budget data; (4) management 
discussion of expected financial performance; (5) strategic or business 
plan; (6) interest rate assumptions; and (7) a copy of the FHLBank's 
board of directors resolution adopting the FHLBank's annual

[[Page 55880]]

operating expense budget and capital expenditures budget.
    One commenter recommended that the reporting requirements imposed 
on the FHLBanks should be limited to submissions of annual approved 
operating expenses and capital expenditures budgets. However, the 
Finance Board believes that the comprehensive collection of information 
on the Banks' financial plans provided for in the final rule, including 
balance sheet and income statement projections, enables the Finance 
Board to review FHLBank operating expenses and capital expenditures in 
context, and provides relevant information necessary to enable the 
Finance Board to carry out its supervisory oversight responsibilities 
over the FHLBanks.

C. Report on Amendments to Total Annual Budgets--Sec. 934.6(c)

    Section 934.6(c) of the final rule requires a FHLBank to submit 
promptly to the Finance Board a copy of the FHLBank's board of 
directors resolution adopting any amendment increasing a FHLBank's 
total annual operating expense budget or total annual capital 
expenditures budget above originally approved budget limits.
    One commenter recommended that only amendments increasing the total 
budget by 10 percent or more be required to be reported to the Finance 
Board. However, the Finance Board believes that any amendment of a 
Bank's total budget should be a rare occurrence which reflects a 
significant change that should be reported to the Finance Board. 
Accordingly, the commenter's recommendation is not adopted in the final 
rule.

D. Mid-year Reforecasting Report--Sec. 934.6(d)

    Rather than requiring the current quarterly reports from the 
FHLBanks of reforecasted projections for the year relative to original 
budget projections, Sec. 934.6(d) of the final rule requires each 
FHLBank to submit a mid-year report containing a balance sheet and 
income statement setting forth reforecasted projections for the year 
relative to the budget projections as originally approved or amended, 
including a management discussion explaining any significant changes.

E. Annual Actual Performance Results Report--Sec. 934.6(e)

    Rather than requiring the current quarterly reports from the 
FHLBanks, which analyze actual performance results for the period 
relative to original budget projections, Sec. 934.6(e) of the final 
rule requires each FHLBank to submit an annual report containing a 
balance sheet and income statement setting forth actual performance 
results for the year relative to the budget projections as originally 
approved or amended, including a management discussion explaining any 
significant changes.

III. Regulatory Flexibility Act

    This final rule applies only to the FHLBanks, which do not come 
within the meaning of ``small entities,'' as defined in the Regulatory 
Flexibility Act (RFA), 5 U.S.C. 601, et seq., section 601(6). 
Therefore, in accordance with the provisions of the RFA, the Board of 
Directors of the Finance Board hereby certifies that this final rule 
will not have a significant economic impact on a substantial number of 
small entities. Id. section 605(b).

List of Subjects in 12 CFR Part 934

    Federal home loan banks, Securities, Surety bonds.

    Accordingly, the Board of Directors of the Finance Board hereby 
amends part 934, subchapter B of chapter IX, title 12, of the Code of 
Federal Regulations, as follows:

PART 934--OPERATIONS OF THE BANKS

    1. The authority citation for part 934 is revised to read as 
follows:

    Authority: 12 U.S.C. 1422a, 1422b, 1432, 1442.

    2. Section 934.6 is revised to read as follows:


Sec. 934.6  Budget preparation and reporting requirements.

    (a) Adoption of annual Bank budgets. (1) Each Bank's board of 
directors shall be responsible for the adoption of an annual operating 
expense budget and a capital expenditures budget for the Bank, and any 
subsequent amendments thereto, consistent with the requirements of the 
Act, this section, other regulations and policies of the Board, and 
with the Bank's responsibility to protect both its members and the 
public interest by keeping its costs to an efficient and effective 
minimum.
    (2) Pursuant to the requirement of section 12(a) of the Act (12 
U.S.C. 1432(a)), a Bank must obtain prior approval of the Board before 
purchasing or erecting, or leasing for a term of more than 10 years, a 
building to house the Bank.
    (3) A Bank's board of directors may not delegate the authority to 
approve the Bank's annual budgets, or any subsequent amendments 
thereto, to Bank officers or other Bank employees.
    (4) A Bank's annual budgets shall be prepared based upon an 
interest rate scenario as determined by the Bank.
    (5) A Bank may not exceed its total annual operating expense budget 
or its total annual capital expenditures budget without prior approval 
by the Bank's board of directors of an amendment to such budget.
    (b) Budget reports. Each Bank shall submit to the Board, by January 
31 of each year, in a format and as further prescribed by the Board, 
such Bank budgets and other financial information as the Board shall 
require, including the following:
    (1) Balance sheet projections;
    (2) Income statement projections, including operating expense 
budget data and staffing levels;
    (3) Capital expenditures budget data;
    (4) Management discussion of expected financial performance;
    (5) Strategic or business plan;
    (6) Interest rate assumptions; and
    (7) A copy of the FHLBank's board of directors resolution adopting 
the FHLBank's annual operating expense budget and capital expenditures 
budget.
    (c) Report on amendments to total annual budgets. A Bank shall 
submit promptly to the Board a copy of the Bank's board of directors 
resolution adopting any amendment increasing a Bank's total annual 
operating expense budget or total annual capital expenditures budget 
above originally approved budget limits.
    (d) Mid-year reforecasting report. Each Bank shall submit to the 
Board, by July 31 of each year, in a format and as further prescribed 
by the Board, a report containing a balance sheet and income statement 
setting forth reforecasted projections for the year relative to the 
budget projections for that year as originally approved or amended, 
including a management discussion explaining any significant changes in 
the reforecasted projections from the budget projections as originally 
approved or amended.
    (e) Annual actual performance results report. Each Bank shall 
submit to the Board, by January 31 of each year, in a format and as 
further prescribed by the Board, a report containing a balance sheet 
and income statement setting forth the actual performance results for 
the prior year relative to the budget projections for that year as 
originally approved or amended, including a management discussion 
explaining any significant changes in the actual performance results 
from the budget projections as originally approved or amended.


[[Page 55881]]


    Dated: October 9, 1996.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 96-27817 Filed 10-29-96; 8:45 am]
BILLING CODE 6725-01-U