[Federal Register Volume 64, Number 196 (Tuesday, October 12, 1999)]
[Rules and Regulations]
[Pages 55125-55131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26283]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 910

[No. 99-51]
RIN 3069-AA78


Allocation of Joint and Several Liability on Consolidated 
Obligations Among the Federal Home Loan Banks

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending 
its rule governing the issuance of consolidated obligations, i.e., 
bonds, notes or debentures (COs) by the Finance Board pursuant to 
section 11 of the Federal Home Loan Bank Act (Act), 12 U.S.C. 1431, to 
establish a framework for the orderly allocation of joint and several 
liability for the COs among the Federal Home Loan Banks (Banks). The 
final rule adds new provisions to the Finance Board's regulations and 
is intended to protect holders of COs to the greatest extent 
practicable by providing a framework to ensure the continued timely 
payment of all principal and interest on COs in the unlikely event of 
the projected or actual inability of a Bank to meet its debt service 
payment obligations.

DATES: This final rule is effective on November 12, 1999.

FOR FURTHER INFORMATION CONTACT: Joseph A. McKenzie, Deputy Chief 
Economist, Office of Policy, Research and Analysis, by telephone at 
(202) 408-2845 or by electronic mail at [email protected], or 
Charlotte A. Reid, Special Counsel, Office of General Counsel, by 
telephone at (202) 408-2510 or by electronic mail at [email protected], or 
by regular mail at the Federal Housing Finance Board, 1777 F Street, 
N.W., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. The Proposed Rule

    On February 11, 1999, the Finance Board published for comment a 
proposed rule to amend its Consolidated Bonds and Debentures Regulation 
(CO Regulation), 12 CFR part 910, to outline a framework for the 
orderly allocation of joint and several liability among the Banks on 
COs issued by the Finance Board pursuant to section 11 of the Act, 12 
U.S.C. 1431. 64 FR 6819 (Feb. 11, 1999). The sixty-day public comment 
period closed on April 12, 1999. The Finance Board received thirteen 
comment letters: twelve from Banks and one from a member institution. 
The commenters, noting the stability and financial strength of the Bank 
System, generally supported the goal of the proposed rule, but 
expressed nearly uniform objection to the certification and reporting 
requirements and requested other changes.
    The Act provides plenary authority to the Finance Board in 
connection with the issuance of COs, for which the Banks are jointly 
and severally liable. Section 11 of the Act authorizes the Finance 
Board to issue rules and regulations governing the issuance of COs. See 
12 U.S.C. 1431(a). Pursuant to the authority set forth in section 11(b) 
and (c) of the Act, the Finance Board may issue consolidated Bank 
debentures or bonds which ``shall be the joint and several obligations 
of all the Federal Home Loan Banks, and shall be secured and be issued 
upon such terms and conditions as the [Finance] Board may prescribe.'' 
See id. at 1431(b) and (c). Moreover, section 11(d) of the Act provides 
that the Finance Board shall have full power to require the Banks to 
``deposit additional collateral or to make substitutions of collateral 
or to adjust equities between the Federal Home Loan Banks.'' Id. at 
1431(d). The Act makes clear that COs are not the obligations of and 
are not guaranteed by the United States. See id. at 1435. The Banks 
collectively are the sole obligors on COs. Finance Board regulations 
governing the issuance of COs are set forth in 12 CFR parts 910 and 
941.

[[Page 55126]]

Section 910.0(b) defines ``consolidated bonds'' to mean ``bonds or 
notes issued on behalf of all Federal Home Loan Banks.'' For purposes 
of this preamble, the terms CO(s), consolidated obligation(s), and 
consolidated bonds are used interchangeably. In the final rule, the 
term consolidated bond(s) is adopted for consistency with the existing 
definitions in Sec. 910.0.
    The Banks finance their operations principally with the proceeds 
from COs issued by the Finance Board on their behalf. As of July 31, 
1999, there were approximately $444.8 billion in COs outstanding. In 
the history of the Bank System, no Bank has ever been delinquent or 
defaulted on a principal or interest payment on any CO issued by the 
Finance Board or the Federal Home Loan Bank Board (FHLBB), its 
predecessor agency.
    Neither the Finance Board nor the FHLBB adopted regulations to 
establish the manner in which the joint and several liability of the 
Banks would operate in the event of impending default or delinquency on 
a CO. The Bank System remains financially healthy and strong, and no 
such default or delinquency is expected. The holders of COs benefit 
from the statutory joint and several liability of the Banks set forth 
in section 11 of the Act. Prudence dictates, however, that the Finance 
Board clarify how the joint and several financial responsibility for 
the COs would be allocated among the Banks if a Bank were to experience 
a payment problem.
    The final rule establishes a procedure to assure timely interest 
and principal payments on all outstanding COs. The final rule will 
provide that any Bank that participates in the proceeds of a CO 
issuance, and that experiences or projects a payment problem, would be 
required to apply its assets first toward the satisfaction of that 
consolidated obligation. The final rule further specifies, as a 
regulatory matter, that the Finance Board, pursuant to its authority to 
ensure that the Banks operate in a safe and sound manner, remain 
adequately capitalized and able to raise funds in the capital markets, 
and to adjust the relative equities among the Banks in connection with 
the issuance of COs, see 12 U.S.C. 1422a(a)(1), (3)(A), (3)(B)(iii) and 
1431(d), has ultimate authority and discretion at any time to call on 
any Bank to make any principal or interest payment on any CO. The 
underlying purpose of the final rule is to emphasize the Finance 
Board's intent that holders of COs not experience any interruption in 
the flow of interest or principal payments.

II. Summary of Comments and Analysis of Changes Made in the Final 
Rule.

A. Definitions--Sec. 910.0

1. Existing Definitions
    The existing definitions in Part 910 are retained with only minor 
revisions. For purposes of consistency with other regulations, 
``Board'' has been redefined as ``Finance Board,'' a definition of 
``Bank'' has been added, and the remaining definitions have been re-
designated accordingly. Additional definitions are addressed as 
follows.
2. Participating Bank
    The proposed rule would have amended Sec. 910.0 of the CO 
regulation to add a new defined term: ``Participating Bank.'' The final 
rule does not adopt that definition because it is not a necessary 
component of the certification requirement as adopted in the final rule 
and does not add to the requirement that each Bank must satisfy its 
direct obligations.
3. Non-Performing Bank
    The proposed rule added another defined term to Sec. 910.0: ``Non-
performing Bank.'' A majority of the commenters contended that the term 
``Non-Performing Bank'' was too broad, had negative or pejorative 
connotations, or could imply a default on the COs where none had 
occurred. One commenter suggested the term should be changed to ``Non-
Compliant Bank'' to focus on the reporting and certification 
requirements. The Finance Board agrees that a change in the terminology 
is appropriate and has revised the term in the final rule to ``Non-
complying Bank.'' Also in response to comments, the Finance Board has 
removed all references to ``net loss'' in the definition and in the 
revisions to the reporting and certification requirements. See 
discussion of Sec. 910.7(b), below. Furthermore, the definition was 
revised to clarify that a Bank also may become a ``Non-complying Bank'' 
if it is required to file a notice pursuant to Sec. 910.7(b)(2).
4. Direct Obligation
    The final rule defines ``direct obligation'' to mean a Bank's 
obligation to repay principal and interest arising from its receipt of 
all or a portion of the proceeds of an issuance of COs by the Finance 
Board on behalf of one or more Banks. A direct obligation also includes 
an obligation to pay CO principal or interest that has been assumed by 
a Bank subsequent to the issuance of the consolidated bond, and any 
obligation to make assistance payments to any other Bank, whether 
pursuant to an agreement between two or more Banks or pursuant to a 
Finance Board payment order. Additionally, consistent with 
Sec. 910.7(e)(1), direct obligation also includes the obligation of an 
assisted Bank to reimburse a Bank that pays the direct obligations of 
the former Bank pursuant to an assistance agreement or by order of the 
Finance Board. Thus, a direct obligation may arise: (1) as a result of 
the receipt of proceeds from the issuance of a CO, or in a subsequent 
assumption of a CO payment obligation; (2) by virtue of becoming 
obligated to make assistance payments to another Bank, either pursuant 
to a voluntary agreement between two or more Banks or pursuant to a 
Finance Board payment order; or (3) pursuant to the obligation to 
reimburse an assisting Bank for assistance payments made under an 
assistance agreement or by order of the Finance Board, including 
related costs and interest.
5. Other Definitional Requests
    In response to several comments, references to consolidated 
obligations have been changed throughout the final rule to reference 
consolidated bonds in order to maintain consistency within part 910 and 
to conform to existing definitions in Sec. 910.0.
    Many commenters requested that certain definitions be added to the 
rule. A majority of commenters requested that the rule define the term 
``non-essential expenses'' to exclude normal operating expenses or 
ordinary operational expenditures incurred in the regular course of 
business such as salaries and benefits, office space and equipment 
expenses. The Finance Board has adopted the recommendation by rewording 
Sec. 910.7(c)(3) of the final rule to clarify that a Bank may continue 
to pay normal operating expenses, including salaries, costs of office 
space or equipment, or related expenses, but must refrain from 
incurring any extraordinary expenses, thus obviating the need for 
another defined term.
    A number of commenters requested that the rule define, by 
establishing a fixed standard, reasonable interest as it relates to 
consolidated bond interest and principal payments made on behalf of a 
non-complying Bank, so as to avoid unnecessary disputes between the 
assisting and assisted Banks. The commenters who addressed the issue 
suggested that the standard should be the Federal Funds rate plus an 
amount, ranging from 50 to 300 basis points, sufficient to be punitive. 
The Finance Board wishes to preserve for itself maximum discretion to 
prescribe a reasonable interest rate based on the case presented. 
Therefore, no definition

[[Page 55127]]

of reasonable interest rate is included in the final rule. Instead, 
Sec. 910.7(d) of the final rule makes it clear that, on amounts paid by 
one Bank to meet the principal and interest payment obligations of 
another Bank, the interest rate on the reimbursement will be set by the 
Finance Board in an order, or will be negotiated between the affected 
Banks, in the case of an inter-Bank assistance agreement, subject to 
the approval of the Finance Board.

B. Joint and Several Liability--Sec. 910.7

    The proposed rule added a new Sec. 910.7 to the CO Regulation to 
establish a framework for the orderly allocation of joint and several 
liability on the COs among the Banks.
1. General Requirements--Sec. 910.7(a)
    The proposed rule at Sec. 910.7(a) would have stated the joint and 
several liability of the Banks and the duty of the Banks to give 
priority to consolidated bond payments.
    One commenter objected to the premise of proposed Sec. 910.7(a)(2), 
that each Bank must ensure the CO payment obligations of all other 
Banks, and suggested that the final rule provide that each Bank be 
responsible only for its own payment obligations. Because the Finance 
Board believes that the essence of joint and several liability is that 
each Bank is ultimately liable for the repayment of any CO, no change 
to this provision has been adopted in the final rule, other than the 
addition of a new subsection (3), which states that the provisions 
shall not restrict, limit, or otherwise diminish the joint and several 
liability of all of the Banks on all of the consolidated bonds.
    Several commenters questioned how other creditors of the Banks, 
such as swap counterparties, would be affected by proposed 
Sec. 910.7(a)(2), and noted that the proposed rule would appear to give 
CO holders payment priority over other creditors of the Bank, 
regardless of the legal priorities among those parties. The Finance 
Board is not attempting to create regulatory creditor priorities that 
would not already exist under law. Therefore, the final rule has been 
revised to address this concern by eliminating reference to ``any other 
creditor not entitled by law or contract to priority over or parity 
with the holder of consolidated obligations.'' A provision was also 
added in Sec. 910.7(g) to clarify that payments made by a Bank to 
satisfy the direct obligations of another Bank shall be made for the 
sole purpose of discharging the joint and several liability of the 
Banks on the consolidated bonds, not for the benefit of other 
creditors.
2. Certification and Reporting--Sec. 910.7(b)
    Section 910.7(b) of the proposed rule would have required each Bank 
President to certify for the upcoming quarter that the Bank will not 
suffer a net loss, will remain in compliance with reserve and liquidity 
requirements, as well as with the Finance Board's Financial Management 
Policy (FMP), and will be capable of making full and timely payment of 
all its direct obligations when due. The proposed rule also would have 
required each Bank immediately to report to the Finance Board any 
projected loss, debt service deficiency or liquidity/reserves 
deficiency.
    The comments expressed a number of objections to Sec. 910.7(b) as 
proposed: (1) the impossibility of certification as to future events; 
(2) misplaced reliance on net loss as an indicator of a Bank's ability 
to meet its direct obligations; (3) the lack of a specific causal nexus 
between potential non-compliance with liquidity requirements and a 
Bank's ability to meet its direct obligations; and (4) each Bank should 
be required only to certify that it will have the ability in the 
upcoming quarter to meet its direct obligations.
    a. Certification as to Future Events. The commenters stated that it 
would be impossible to certify as to future events given the potential 
variables that affect financial statements, and were concerned that 
forward-looking certifications might subject a Bank to liability if 
events played out other than as predicted. Commenters also objected to 
the certification requirement on the basis that a certification, which 
generally involves confirmation of known facts as of a certain date, 
would be a factual impossibility because factors beyond the control of 
a Bank could preclude the Bank from being able to state with certainty 
three months in advance that no change in circumstances would occur.
    One commenter suggested that the lack of certainty as to future 
projections could be dealt with either by revising the required 
representation to assert that ``the President has no knowledge of any 
facts that would materially affect the accuracy of the certification,'' 
or requiring, based on information known to the Bank, reasonable 
assurance that the Bank will remain in compliance and be capable of 
fulfilling CO payments in the upcoming quarter.
    Another commenter favored requiring that Bank management provide a 
negative assurance stating that, as of the date of the quarterly 
certification, Bank management has no actual knowledge of material 
facts that through the next quarter could foreseeably prevent the Bank 
from making full and timely payment of interest and principal on the 
COs due and payable in the upcoming quarter. To improve on the 
reporting requirement, the commenter urged that the Banks be allowed to 
rely on the unqualified opinion provided annually by a Bank's 
independent certified accountant and eliminate the management 
certification.
    Concerned commenters noted that if certifications are given and 
subsequent unanticipated events adversely affect the accuracy of the 
statements or the ability of a Bank to make full and timely direct 
obligation payments when due, the result could be causes of action 
against the Bank and the Finance Board for false certifications.
    While the Finance Board does not believe that a negative assurance 
or a reasonable assurance statement would accomplish the same goal as 
the certification and reporting requirements, the Finance Board does 
believe that many of the other concerns raised by the commenters have 
merit. The final rule addresses these concerns by modifying the 
certification requirement to reflect that the certification should be 
based on known information, current facts and financial information, 
which the Finance Board expects will follow reasonable investigation.
    b. Net Loss. Many commenters objected to being required to certify 
that a Bank would not sustain a net loss in the upcoming quarter on the 
grounds that net loss is an inappropriate measure for determining 
ability to meet CO payment obligations. Several Bank commenters called 
for the term to be eliminated from the rule, or defined if the 
certification and reporting requirements were to be retained in the 
final rule. One commenter stated that net income and net loss are 
accounting concepts that bear virtually no relation to cash flow, which 
is the primary factor affecting a Bank's ability to make payments.
    One commenter suggested that the rule should provide that prior to 
allocating loss to all Banks, the Finance Board should look to the 
other participating Banks for payment of principal and interest where 
another participating Bank is unable to make the payments for which it 
is responsible. Some of the Banks expressed a desire that the reporting 
periods be specified in the rule.
    Several commenters argued that the various periodic financial 
condition reports already required to be filed by

[[Page 55128]]

the Banks with the Finance Board \1\ provide sufficient notice to the 
Finance Board of any potential difficulty a Bank might experience in 
meeting its debt obligations, and that the certification and reporting 
requirements would be unnecessarily duplicative and burdensome.
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    \1\ See, e.g., 12 CFR 934.7 (balance sheets and income statement 
projects); 12 CFR 934.17 (support for dividend requests); 12 CFR 
937.2 (information for Bank System quarterly and annual reports).
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    The Finance Board agrees with many of the observations in the 
comments, and has addressed commenters' objections by eliminating the 
requirement that each Bank must certify that it will not sustain a net 
loss in the upcoming quarter.
    c. Lack of Causal Nexus Between Liquidity and Ability to Pay Direct 
Obligations. Many comments focused on what factors actually affect a 
Bank's ability to meet its obligations and noted that non-compliance 
with liquidity requirements is not tantamount to an inability to make 
such payments.
    One commenter, calling the liquidity requirements outmoded, stated 
that compliance with the liquidity requirements is not an accurate 
reflection of the Bank's ability to meet its payment obligations. The 
commenter said that factors that would more likely cause a negative 
impact on a Bank's ability to service its debt would be an inability to 
access the capital markets to replace maturing or called debt, and that 
the certification requirement is inconsistent with real world balance 
sheet management.
    The Finance Board does not agree with the comment that compliance 
with the statutory and regulatory liquidity requirements does not bear 
any financial relationship to a Bank's ability to meet its direct 
obligations and has adopted this requirement in the final rule without 
change. The comment is premised on the assumption that the Banks can 
raise funds in the capital markets at will. However, since the Banks at 
times may face inhospitable conditions in the capital markets during 
which they might be unable to raise large amounts of money in very 
short time periods, the Finance Board believes it is advisable for the 
Banks to maintain sufficient, highly liquid assets to meet member 
demands. Because the Banks are required to maintain compliance with 
statutory and regulatory liquidity requirements at all times, no 
additional burden should be imposed by the requirement in the final 
rule that a Bank certify to that compliance.
    d. Certification Only to Direct Obligations. The commenters 
requested that the proposed rule be clarified to require a Bank to 
certify only that it will remain capable of making full and timely 
payment of its share of all principal and interest payments on COs. The 
Finance Board concurs in these comments and has clarified the final 
rule to state that each Bank must certify that it will remain capable 
of making full and timely payment of all of its current obligations, 
including direct obligations. Direct obligations would also include the 
obligation to reimburse an assisting Bank for the payment of the 
assisted Bank's direct obligations, as provided for in Sec. 910.7(e)(1) 
of the final rule.
    e. The Reporting Requirement. The proposed rule called for each 
Bank to report immediately to the Finance Board if: (1) the Bank was 
unable to provide the required certification; (2) subsequent to 
providing the certification, the Bank projected that it would incur a 
net loss, fail to comply with liquidity requirements or would be unable 
to satisfy its payment obligations on consolidated bonds; (3) the Bank 
actually missed a consolidated bond payment, incurred a net loss or 
failed to comply with liquidity requirements. The commenters offered 
criticisms nearly identical to those for the certification requirement. 
Additionally, some commenters recommended that the rule specify the 
reporting period.
    In response to the comments, the final rule eliminates the 
requirement to file a report in favor of a notice requirement. Section 
910.7(b)(2) of the final rule requires a Bank to submit immediate 
written notice to the Finance Board if the Bank is or is expected to be 
unable to provide the certification when due as required by 
Sec. 910.7(b)(1), or, if at any time, a Bank projects that it will not 
meet its liquidity requirements, direct obligations or other current 
obligations. Notice is also required if the Bank actually fails to meet 
its liquidity requirements or direct obligations. Such notice also is 
required if a Bank is in negotiations to enter or enters into an 
assistance agreement with another Bank for the payment of its direct 
obligations or other current obligations. Similarly, if a Bank 
experiences a temporary interruption in its payment operations due to 
an external event, which is not necessarily related to the financial 
condition of the Bank such as a natural disaster or power failure, the 
Bank must notify the Finance Board. A notice required by 
Sec. 910.7(b)(2) may be provided by a senior officer of the Bank having 
knowledge of its financial condition and authorized by the Bank to sign 
the notice.
    Finally, Sec. 910.7(b)(3) of the proposed rule provided that the 
Finance Board could require a Bank to file a report, accompanied by a 
consolidated obligation payment plan, if the Finance Board had reason 
to believe the Bank was about to default on an obligation or cease to 
be compliance with the statutory or regulatory liquidity requirements. 
This provision has not been adopted as part of the final rule because 
the Finance Board believes it would be redundant in light of the 
revisions to the certification, notice and payment plan provisions.
3. Consolidated Obligation Payment Plan--Sec. 910.7(c)
    Proposed Sec. 910.7(c) would have required any Bank projecting or 
experiencing an inability to service its current COs to submit a 
consolidated obligation payment plan to the Finance Board and to 
refrain from incurring non-essential operating expenses, declaring or 
paying dividends, or redeeming any stock, until its CO payment plan is 
approved by the Finance Board and its consolidated obligation payment 
obligations were satisfied.
    One commenter recommended that Sec. 910.7(c) be modified to require 
only that the plan address the methods a Bank would undertake ``to make 
full and timely payment of its share of all principal and interest 
consolidated obligation payments in which the [Federal Home Loan] Bank 
is a participating Bank.'' The final rule clarifies that a Bank must 
file a consolidated bond payment plan outlining the methods to be used 
to meet its current obligations, including direct obligations. The 
comment that the payment of non-essential expenses should contain an 
exception for ``ordinary operational expenditures incurred by a Bank in 
its regular course of business,'' has also been adopted in 
Sec. 910.7(c)(3) of the final rule.
    One commenter proposed that the final rule should make provision 
for the Finance Board to accept or request modifications on a 
consolidated bond payment plan within a certain timeframe, and for 
automatic approval of the payment plan if the Finance Board fails to 
act by a date certain. Another commenter opposed the restrictions set 
forth in proposed Sec. 910.7(c)(3) on payment of dividends or 
redemption of stock as being draconian. The commenter argued that the 
Finance Board should impose such sanctions only after it has reviewed 
the specific situation. The final rule is designed to allow the Finance 
Board to analyze any proffered payment plan independently and in the 
circumstances presented. A

[[Page 55129]]

fixed timeframe for automatic approval would not further the purpose of 
the rule which is to afford the Finance Board a rational regulatory 
process for the necessary deliberation of all relevant factors. 
Additionally, the restrictions as to payment of dividend or stock 
redemption are intended to preserve assets that may be needed to ensure 
that the Bank will be able to continue to operate and make full and 
timely CO payments. For these reasons, this provision of the final rule 
has been adopted as proposed.
    Other commenters urged the Finance Board to build flexibility into 
the rule to allow Banks to develop recovery plans or participate in 
fully-secured inter-Bank loans that would provide for orderly recovery 
short of liquidation, depending on the severity of the Bank's financial 
condition. The Finance Board has adopted certain modifications to the 
rule and believes that as revised the final rule provides sufficient 
flexibility in how the consolidated bond payment plans would be 
structured, and makes sufficient provision for payment assistance 
agreements to be reached between Banks. Inter-Bank consolidated bond 
payment assistance agreements are subject to Finance Board approval. 
Under the final rule, a Bank must notify the Finance Board when it 
commences negotiations for such an assistance agreement with one or 
more other Banks, and may not implement an assistance agreement prior 
to Finance Board approval. Thus, the final rule clearly affords 
oversight authority to the Finance Board to evaluate any given 
situation individually and determine what remedial steps are 
appropriate or required.
    The final rule requires a Bank to file a consolidated bond payment 
plan for Finance Board approval if the Bank fails to provide the 
certification required in paragraph (b)(1), is required to provide the 
notice required in paragraph (b)(2), or if the Finance Board determines 
that the Bank will cease to be in compliance with the liquidity 
requirements or will be unable to meet its current obligations, 
including its direct obligations. The final rule requires that the 
consolidated bond payment plan specify the measures the Bank will 
undertake to meet its current obligations, including its direct 
obligations. The final rule permits a non-complying Bank to continue to 
incur and pay normal operating expenses in the regular course of 
business, but requires such a Bank to refrain from incurring any 
extraordinary expenses, declaring or paying dividends or redeeming 
capital stock until the Finance Board has approved the plan and the 
Bank's direct obligations have been met.
    The Finance Board would have authority under the final rule to take 
into consideration any capital requirements mandated by statute or 
regulation, and make provision for the Banks to redeem capital and pay 
dividends in accordance with the applicable provisions of the Act. The 
Finance Board may waive or amend the consolidated bond payment plan 
requirements as necessary to accommodate future legislative changes to 
the capital structure of the Bank System. A separate, specific 
reservation of authority to do so is unnecessary.
4. Finance Board Payment Orders--Sec. 910.7(d)
    Under proposed Sec. 910.7(d), in the remote event that a Bank would 
be unable, due to actual or projected cash flow or balance sheet 
deficiencies, to service its direct obligations, the Finance Board 
could have ordered one or more other Banks to make such payments. The 
non-complying Bank would have been liable to the assisting Banks for 
reimbursement. The Finance Board would look to the assets of the non-
complying Bank for reimbursement of such payments.
    Section 910.7(d)(1) of the final rule makes clear that the Board of 
Directors of the Finance Board, in its discretion and notwithstanding 
any other provision in the rule, may at any time order any Bank to make 
any payment on any consolidated bond. The final rule in 
Sec. 910.7(d)(2) establishes unequivocally that to the extent a Bank 
makes an assistance payment, whether by agreement or by order of the 
Board of Directors of the Finance Board, the assisting Bank is entitled 
to reimbursement of the assistance, including costs and interest. The 
rate of interest for the reimbursement for payments made to assist a 
non-complying Bank in making its payment obligations will be set by the 
Board. Additionally, the final rule clarifies that where an agreement 
is reached between an assisting Bank and a non-complying Bank (or one 
whose payment capabilities were temporarily impaired by payment system 
disruptions outside the control of the Bank) the negotiated rate will 
be subject to the approval of the Finance Board. As discussed 
previously herein, the Finance Board disagrees with the recommendations 
from commenters that the rate of interest on reimbursement payments 
should be set in the regulation at the Federal Funds rate plus 50 to 
300 basis points or at an amount high enough to reflect the serious 
nature of a potential default and act as a deterrent. In the Finance 
Board's view, the interest rate is a necessary business component to 
compensate the assisting Bank for its expenses and assistance. The 
Finance Board has chosen to reserve to itself the authority to set a 
reasonable interest rate or to approve the terms, including an interest 
rate, of negotiated assistance agreements.
5. Adjustment of Equities--Sec. 910.7(e)
    Under proposed Sec. 910.7(e), the reallocation of the payment 
obligations among the other Banks would have been based on the pro rata 
participation of each Bank in all COs outstanding as of the most recent 
month end for which the Finance Board has data. The reallocation (as 
opposed to payments that may be ordered by the Finance Board) would 
have occurred only after the non-complying Bank had applied all of its 
assets to service all of its direct consolidated obligations.
    Several commenters expressed concern that the requirement in 
proposed Sec. 910.7(e)(1), that a defaulting Bank shall apply its 
assets to fulfill its consolidated obligations payment obligations, 
could require a Bank to sell assets classified as ``held to maturity'' 
under ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, 
Statement of Financial Accounting Standards No. 115 (Fin. Accounting 
Standards Bd. 1993) and thereby require the Bank to mark-to-market its 
entire portfolio and further worsen the Bank's financial position.
    One commenter asked for clarification of whether all of a Bank's 
assets would have to be applied to the payment of COs before such 
assets could be used to pay expenses as provided in proposed 
Secs. 910.7(a)(2) and (c). Another commenter suggested that the 
solution to that interpretation would be to construe the phrase ``apply 
its assets'' to mean that a Bank may be required to apply interest 
earned on its assets, and any cash received upon maturity of assets to 
payment of consolidated obligations, after payment of all necessary 
expenses, then there should be minimal adverse ramifications to the 
Banks.
    The final rule clarifies that a non-complying Bank shall apply all 
of its assets to pay its direct obligations, including amounts owed to 
reimburse any Bank that has provided assistance in meeting the non-
complying Bank's direct obligations, whether under an assistance 
agreement or by order of the Finance Board.
    A Bank that provides assistance to another Bank whose operations 
temporarily are impaired by a natural

[[Page 55130]]

disaster or power failure will have a similar right to reimbursement. 
Finally, Sec. 910.7(e)(3) provides that where the Finance Board 
determines that a Bank is a non-complying Bank, then the Finance Board 
may allocate the non-complying Bank's outstanding direct obligation 
liability among the remaining Banks on a pro rata basis in proportion 
to each Bank's participation in all COs as of the end of the most 
recent month for which the Finance Board has data. In Sec. 910.7(e)(1) 
of the final rule, a non-complying Bank is presumed to have 
insufficient assets to continue to operate as usual and make full and 
timely CO payments. The finding of asset insufficiency in paragraph (e) 
differs from the situation contemplated by Sec. 910.7(c)(3) of the 
final rule. In the latter section, the final rule assumes that the non-
complying Bank will continue to operate as usual, albeit under the 
terms of a payment plan approved by the Finance Board. A non-complying 
Bank is thus expressly authorized to continue to incur and pay ordinary 
operating expenses.
    The final rule thus contemplates that the Finance Board will have 
to intervene to ensure that a non-complying Bank's CO payments are 
fully and timely made and that its assets are appropriately applied to 
outstanding consolidated bond obligations and other obligations as 
provided in the final rule. The Act specifically provides the authority 
for the Finance Board to do so, see 12 U.S.C. 1431(d), and the final 
rule provides a regulatory framework for the Finance Board to evaluate 
the overall situation and implement a rational payment solution. 
Section 910.7(f) of the final rule expressly reserves to the Finance 
Board the authority to adjust the equities of the Banks in a manner 
different from the manner scripted in Sec. 910.7(e) to ensure the 
safety and soundness of one or more of the Banks.
    Several commenters suggested that the final rule permit inter-Bank 
loans to assist in meeting payment obligations, upon terms and 
conditions negotiated between the Banks, which would obviate the need 
for the Finance Board to order a Bank to cover the CO payments of 
another Bank. Another commenter argued in favor of a system providing 
for the resources of all co-participating Banks to be tapped before the 
assets of a non-participating Bank are applied to cover the liability 
of a Bank. The Finance Board believes this could create disincentives 
for the Banks to enter into CO issuances as co-participants and has not 
incorporated this comment into the final rule. In addition, the final 
rule provides for inter-Bank loans and will require that the assisted 
Bank file notice pursuant to Sec. 910.7(b) and thus trigger the 
provisions for CO payment plans and Finance Board review.
6. Reservation of Rights--Sec. 910.7(f)
    Under proposed Sec. 910.7(f), the Finance Board reserved its 
authority to take supervisory, enforcement or other action against any 
Bank pursuant to the Act to ensure that the Banks are operated in a 
safe and sound manner. The final rule adopts this and expressly 
preserves the Finance Board's authority to adjust the equities between 
the Banks in any manner different from that set forth in this rule.
7. No Rights Created--Sec. 910.7(g)
    Several commenters suggested that the proposed rule be revised 
expressly to provide that the certification and reporting requirements 
of the rule do not create any rights in any third party and that non-
compliance with the provisions of the rule would not constitute a 
default under the COs. The Finance Board has adopted this suggestion by 
including a new Sec. 910.7(g) in the final rule. The final rule 
provides that nothing in the section shall be deemed to create any 
rights in any third party, payments made by a Bank on the direct 
obligations of another Bank are made solely to discharge the joint and 
several obligation of the Banks on the consolidated bonds, and 
complying with or failing to comply with the provisions of this section 
shall not be deemed to be an event of default under any consolidated 
bond.

III. Regulatory Flexibility Act

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

IV. Paperwork Reduction Act

    The final rule does not contain any collections of information 
pursuant to the Paperwork Reduction Act of 1995. See 44 U.S.C. 350, et 
seq. Consequently, the Finance Board has not submitted any information 
to the Office of Management and Budget for review.

List of Subjects in 12 CFR Part 910

    Consolidated bonds and debentures, Banks, Securities.

    For the reasons stated in the preamble, the Finance Board amends 12 
CFR part 910 as follows:

PART 910--CONSOLIDATED BONDS AND DEBENTURES

    1. Revise the authority citation for part 910 to read as follows:

    Authority: 12 U.S.C. 1422a, 1422b and 1431.

    2. Amend Sec. 910.0 by:
    A. Revising paragraph (a).
    B. Redesignating paragraphs (b) through (d) as paragraphs (c) 
through (e), respectively.
    C. Adding a new paragraph (b).
    D. Revising newly designated paragraph (c).
    E. Adding paragraphs (f) and (g).
    The additions and revisions read as follows:


Sec. 910.0  Definitions.

    (a) Finance Board means the Federal Housing Finance Board.
    (b) Bank means Federal Home Loan Bank.
    (c) Consolidated bond means any bond or note issued on behalf of 
one or more Banks by the Finance Board pursuant to section 11(c) of the 
Federal Home Loan Bank Act, as amended (the Act) (12 U.S.C. 1431(c)).
* * * * *
    (f) Direct Obligation means an obligation of a Bank to make any 
principal or interest payment due on a consolidated bond, whether such 
obligation arises from:
    (1) The Bank's receipt of sale proceeds from the issuance of that 
consolidated bond or the assumption of the obligation in a voluntary 
transaction subsequent to the issuance of the bond;
    (2) An obligation to make an assistance payment to any other Bank, 
whether made pursuant to an agreement between one or more Banks or 
pursuant to a Finance Board payment order; or
    (3) An assistance payment reimbursement obligation.
    (g) Non-complying Bank means any Bank that fails to certify, 
pursuant to Sec. 910.7(b)(1) of this part, that it is able to pay all 
of its current obligations, including direct obligations, in full when 
due; that fails to make consolidated bond payments in full when due; 
that is required to file a notice pursuant to Sec. 910.7(b)(2) or a 
consolidated bond payment plan pursuant to Sec. 910.7(c); or that is 
determined by the Finance Board to require assistance in meeting its 
direct obligations on consolidated bonds.
    3. Add Sec. 910.7 to read as follows:


Sec. 910.7  Joint and several liability

    (a) In general. (1) Each and every Bank, individually and 
collectively, has an obligation to make full and timely payment of all 
principal and interest on consolidated bonds when due.

[[Page 55131]]

    (2) Each and every Bank, individually and collectively, shall 
ensure that the timely payment of principal and interest on all 
consolidated bonds is given priority over, and is paid in full in 
advance of, any payment to or redemption of shares from any 
shareholder.
    (3) The provisions of this section shall not limit, restrict or 
otherwise diminish, in any manner, the joint and several liability of 
all of the Banks on all of the consolidated bonds issued by the Finance 
Board pursuant to section 11(c) of the Act.
    (b) Certification and reporting. (1) Before the end of each 
calendar quarter, and before declaring or paying any dividend for that 
quarter, the President of each Bank shall certify in writing to the 
Finance Board that, based on known current facts and financial 
information, the Bank will remain in compliance with the liquidity 
requirements set forth in section 11(g) of the Act (12 U.S.C. 1431(g)), 
and the Finance Board's Financial Management Policy (as the same may be 
amended, modified or replaced), and will remain capable of making full 
and timely payment of all of its current obligations, including direct 
obligations, coming due during the next quarter.
    (2) A Bank shall immediately provide written notice to the Finance 
Board if at any time:
    (i) The Bank is unable to provide the certification required in 
paragraph (b)(1) of this section;
    (ii) The Bank projects at any time that it will fail to comply with 
statutory or regulatory liquidity requirements, or will be unable to 
timely and fully meet all of its current obligations, including direct 
obligations, due during the quarter;
    (iii) The Bank actually fails to comply with statutory or 
regulatory liquidity requirements or to timely and fully meet all of 
its current obligations, including direct obligations, due during the 
quarter; or
    (iv) The Bank negotiates to enter or enters into an agreement with 
one or more other Banks to obtain financial assistance from such 
Bank(s) to meet its current obligations, including direct obligations, 
due during the quarter; the notice of which shall be accompanied by a 
copy of the agreement, which shall be subject to the approval of the 
Finance Board.
    (c) Consolidated bond payment plans. (1) A Bank promptly shall file 
a consolidated bond payment plan for Finance Board approval:
    (i) If it becomes a non-complying Bank as a result of failing to 
provide the certification required in paragraph (b)(1) of this section;
    (ii) If it becomes a non-complying Bank as a result of being 
required to provide the notice required pursuant to paragraph (b)(2) of 
this section, except in the event that a failure to make a principal or 
interest payment on a consolidated bond when due was caused solely by a 
temporary interruption in the Bank's debt servicing operations 
resulting from an external event such as a natural disaster or a power 
failure; or
    (iii) If the Finance Board determines that a Bank will cease to be 
in compliance with the statutory or regulatory liquidity requirements, 
or will lack the capacity to timely and fully meet all of its current 
obligations, including direct obligations, due during the quarter.
    (2) A consolidated bond payment plan shall specify the measures the 
non-complying Bank will undertake to make full and timely payments of 
all of its current obligations, including direct obligations, due 
during the applicable quarter.
    (3) A non-complying Bank may continue to incur and pay normal 
operating expenses incurred in the regular course of business 
(including salaries, benefits, or costs of office space, equipment and 
related expenses), but shall not incur or pay any extraordinary 
expenses, or declare, or pay dividends, or redeem any capital stock, 
until such time as the Finance Board has approved the Bank's 
consolidated bond payment plan or inter-Bank assistance agreement, or 
ordered another remedy, and all of the non-complying Bank's direct 
obligations have been paid.
    (d) Finance Board Payment Orders; Obligation to Reimburse. (1) The 
Board of Directors of the Finance Board, in its discretion and 
notwithstanding any other provision in this section, may at any time 
order any Bank to make any principal or interest payment due on any 
consolidated obligation.
    (2) To the extent that a Bank makes any payment on any consolidated 
obligation on behalf of another Bank, the paying Bank shall be entitled 
to reimbursement from the non-complying Bank, which shall have a 
corresponding obligation to reimburse the Bank providing assistance, to 
the extent of such payment and other associated costs (including 
interest to be determined by the Finance Board).
    (e) Adjustment of equities. (1) Any non-complying Bank shall apply 
its assets to fulfill its direct obligations.
    (2) If a Bank is required to meet, or otherwise meets, the direct 
obligations of another Bank due to a temporary interruption in the 
latter Bank's debt servicing operations (e.g., in the event of a 
natural disaster or power failure), the assisting Bank shall have the 
same right to reimbursement as set forth in paragraph (e)(1) of this 
section.
    (3) If the Finance Board determines that the assets of a non-
complying Bank are insufficient to satisfy all of its direct 
obligations as set forth in paragraph (e)(1) of this section, then the 
Finance Board may allocate the outstanding liability among the 
remaining Banks on a pro rata basis in proportion to each Bank's 
participation in all consolidated obligations outstanding as of the end 
of the most recent month for which the Finance Board has data.
    (f) Reservation of authority. Nothing in this section shall affect 
the Finance Board's authority to adjust the equities between the Banks 
in any manner different than the manner described in this section, or 
to take such enforcement or other action against any Bank pursuant to 
the Finance Board's authority under the Act or otherwise to supervise 
the Banks and ensure that they are operated in a safe and sound manner.
    (g) No rights created. (1) Nothing in this section shall create or 
be deemed to create any rights in any third party.
    (2) Payments made by a Bank toward the direct obligations of 
another Bank are made for the sole purpose of discharging the joint and 
several liability of the Banks on the consolidated bonds.
    (3) Compliance, or the failure to comply, with any provision in 
this section shall not be deemed a default under the terms and 
conditions of the consolidated bonds.

    Dated: October 4, 1999.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 99-26283 Filed 10-8-99; 8:45 am]
BILLING CODE 6725-01-P