[Federal Register Volume 65, Number 2 (Tuesday, January 4, 2000)]
[Notices]
[Pages 339-340]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-36]



  Federal Register / Vol. 64, No. 2 / Tuesday, January 4, 2000 / 
Notices  

[[Page 339]]



FEDERAL HOUSING FINANCE BOARD

[NO. 99-61A ]
RIN 3069-AA88


Proposed Changes to the Financial Management Policy of the 
Federal Home Loan Bank System

AGENCY: Federal Housing Finance Board.

ACTION: Notice.

-----------------------------------------------------------------------

SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing 
to amend its policy statement entitled ``Financial Management Policy of 
the Federal Home Loan Bank System'' (FMP). The proposed amendments to 
the FMP are being made in conjunction and conformance with proposed 
regulatory changes to the Finance Board's regulations regarding the 
Office of Finance (OF), described in detail in a Proposed Rule 
published elsewhere in this issue of the Federal Register. The proposed 
regulatory changes would reorganize the OF, a joint office of the 
Federal Home Loan Banks (Bank or Banks), and broaden its duties, 
functions and responsibilities in two key respects: (1) the OF would 
perform consolidated obligation (CO) issuance functions, including 
preparation of combined financial reports, for the Banks; and (2) the 
OF would serve as a vehicle for the Banks to carry out joint activities 
in a way that promotes operating efficiency and effectiveness in 
achieving the mission of the Banks.

DATES: The Finance Board will accept comments on the proposed changes 
to the FMP in writing on or before March 6, 2000.

ADDRESSES: Send comments to Elaine L. Baker, Secretary to the Board, by 
electronic mail at [email protected], or by regular mail at the Federal 
Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 20006. 
Comments will be available for public inspection at this address.

FOR FURTHER INFORMATION CONTACT: Joseph A. McKenzie, Deputy Chief 
Economist, Office of Policy, Research and Analysis, 202/408-2845, 
[email protected]; Charlotte A. Reid, Special Counsel, Office of 
General Counsel, 202/408-2510, [email protected]; or Eric E. Berg, Senior 
Attorney, Office of General Counsel, 202/408-2589, [email protected]. 
Staff also can be reached by regular mail at the Federal Housing 
Finance Board, 1777 F Street, N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Background

    The FMP evolved from a series of policies and guidelines initially 
adopted by the former Federal Home Loan Bank Board (FHLBB), predecessor 
agency to the Finance Board, in the 1970s and revised a number of times 
thereafter. The Finance Board adopted the FMP in 1991, consolidating 
into one document the previously separate policies on funds management, 
hedging, and interest-rate swaps, and adding new guidelines on the 
management of unsecured credit and interest-rate risks. See 62 FR 13146 
(Mar. 19, 1997).
    The FMP generally provides a framework within which the Banks may 
implement their financial management strategies in a prudent and 
responsible manner. Specifically, the FMP identifies the types of 
investments the Banks may purchase pursuant to their statutory 
investment authority and includes a series of guidelines relating to 
the funding and hedging practices of the Banks and the management of 
their credit, interest-rate, and liquidity risks. The FMP also 
establishes liquidity requirements in addition to those required by 
statute. See FMP secs. III-IV.

II. Analysis of the FMP amendments

    Pursuant to section 11 of the Federal Home Loan Bank Act, 12 U.S.C. 
1431, and the proposed changes to 12 CFR parts 900, 910 and 941 
described in detail in a Proposed Rule published elsewhere in this 
issue of the Federal Register, the Finance Board and the Banks have 
authority to issue through the OF consolidated obligations (COs), i.e., 
bonds, notes, or debentures on which the Banks are jointly and 
severally liable. Under the FMP, a Bank is authorized to participate in 
the proceeds from COs, so long as entering into such transactions will 
not cause the Bank's total COs and unsecured senior liabilities to 
exceed 20 times its capital. See FMP sec. IV.C.
    The FMP also authorizes a Bank to participate in certain types of 
standard and non-standard debt issues. See id. Specifically, the FMP 
requires a Bank participating in non-standard debt issues to enter into 
a contemporaneous hedging arrangement that passes the interest-rate or 
basis risk through to the hedge counterparty unless the Bank is able to 
document that the debt will be used to fund mirror-image assets in an 
amount equal to the debt, offset or reduce interest-rate or basis risk 
in the Bank's portfolio, or otherwise assist the Bank in achieving its 
interest-rate or basis risk management objectives. If a Bank 
participates in debt denominated in a currency other than U.S. dollars, 
it is required to hedge the currency exchange risk. See id. at sec. 
IV.C.3.
    The proposed FMP amendments would delete existing section IV, 
``Funding Guidelines,'' and replace it with a new section IV titled 
``Minimum Total Capital and Hedging Requirements.'' The new section 
would read as follows:

    Minimum Total Capital and Hedging Requirements.
    A. Leverage limit. Each Bank shall have and maintain at all 
times total capital in an amount equal to at least 4.76 percent of 
the Bank's total assets. For purposes of this section, total capital 
is the sum of a Bank's retained earnings and total paid-in capital 
stock outstanding, less the Bank's unrealized net losses on 
available-for-sale securities.
    B. Prohibition on foreign currency or commodity positions. A 
Bank shall not take a position in any commodity or foreign currency. 
If a Bank participates in consolidated obligations denominated in a 
currency other than U.S. dollars or linked to equity or commodity 
prices, it must hedge the currency, equity, and commodity risks.

    The proposed FMP amendments would eliminate the Funding Guidelines, 
with one exception, as unnecessary in light of the proposed 
comprehensive regulatory amendments published elsewhere in this issue 
of the Federal Register. The one exception concerns the leverage limit. 
Currently, Finance Board regulations (12 CFR 910.1(b)) and the FMP 
provide that, on a Bank System-wide and Bank-by-Bank basis, 
respectively, liabilities cannot exceed 20 times paid-in capital stock, 
retained earnings, and reserves. As discussed in detail in the proposed 
rulemaking, the Finance Board is proposing to remove the System-wide 
liability-based leverage limit from Finance Board regulations as 
unnecessary, and is here proposing to replace the current Bank-by-Bank 
liability-based leverage limit in the FMP with a minimum total capital 
requirement that would, in effect, recast the leverage limit as a 
percentage of assets, that is, that a Bank's total assets cannot exceed 
21 times its capital, or inversely, capital must be at least 4.76 
percent of assets. The Bank System had an average capital-to-assets 
ratio of 5.1 percent at September 30, 1999.
    Neither the elimination of the Bank System-wide leverage limit from 
the Finance Board regulations, nor the proposed revision to the Bank-
by-Bank leverage limit contained in the FMP, would have any practical 
effect on the Bank System or its bondholders. The Finance Board, as the 
regulator of the Banks, would continue to monitor each Bank for 
compliance with the individual leverage limit included in

[[Page 340]]

the FMP. The current FMP prohibits a Bank from participating in COs if 
such transactions would cause the Bank's liabilities to exceed 20 times 
the Bank's total capital. The proposed revision to the FMP would 
establish an equivalent leverage standard stated as a percentage of 
assets that would require each Bank to maintain capital of at least 
4.76 percent of its total assets. Imposition of the 4.76 percent 
standard on each Bank will ensure that the Bank System itself stays 
within the leverage limit, rendering retention of a Bank System-wide 
leverage limit unnecessary. Further, the Finance Board notes that with 
the recent passage of Title VI of the Gramm-Leach-Bliley Act, the 
Federal Home Loan Bank System Modernization Act of 1999, Pub. L. 106-
102, 113 Stat. 1338 (Nov. 12, 1999), the Banks will be subject to 
statutory leverage limits and risk-based capital requirements. When 
implemented in regulations, the new risk-based capital regime will 
provide an additional safeguard to the Bank System and its bondholders 
by requiring Banks to hold capital in proportion to the risks they 
assume.
    The changes reflected in proposed section IV.B of the FMP do not 
draw the distinction between standard and non-standard debt issues 
contained in the current FMP. Instead, the changes require the Banks to 
hedge some types of debt issues previously defined as non-standard. The 
types of debt issues that must be hedged under the proposed amendments 
to the FMP are those linked to equity or commodity prices or those 
denominated in foreign currencies.
    The Finance Board also is taking this opportunity to propose a 
change in the FMP unrelated to the issuance of debt or the OF 
reorganization. Section VII of the FMP contains guidelines for the 
Banks on the management of interest-rate risk. The Finance Board uses 
duration of equity as its primary measure of interest-rate risk. The 
current FMP gives the Banks an option on how to calculate their 
duration of equity. The option deals with the inclusion or exclusion of 
the cash flows associated with the Bank's Affordable Housing Program 
(AHP) and Resolution Funding Corporation (REFCorp) obligations. Since 
1995, each Bank has to contribute a minimum of 10 percent of its annual 
income (net of its REFCorp obligation) for the AHP, with a Bank System-
wide minimum of $100 million. See 12 U.S.C. 1430(j)(5)(C). In addition, 
the Banks, in the aggregate, formerly were required annually to 
contribute $300 million towards the Bank System's REFCorp obligation. 
Id. 1441b(f)(2)(c) (superseded).
    The Gramm-Leach-Bliley Act changed the REFCorp obligation for years 
2000 and beyond from a fixed annual payment of $300 million to the 
payment of 20 percent of the Banks' net earnings (net of AHP and 
operating expenses), with the payment period extended or shortened as 
necessary to ensure full payment of the present value of the 
obligation. Since the AHP has not been a fixed dollar obligation since 
1994 and the REFCorp obligation will no longer be a fixed dollar 
amount, the Finance Board proposes to prohibit the Banks from managing 
their assets and liabilities as if these items are fixed dollar 
obligations. Instead, under the revised FMP, a Bank would treat these 
obligations as typical variable expenses (like operating expenses) for 
purposes of asset-liability management. Because the Banks' AHP and 
REFCorp obligations are variable expenses, the Finance Board believes 
that it would not be appropriate for the Banks to include AHP and 
REFCorp-related cash flows in their duration of equity calculations. 
The Finance Board originally proposed this change to the FMP in 1997. 
See 62 FR 13146 (Mar. 19, 1997). The proposed language would read as 
follows:

    Each Bank is required to report its cash flows and calculate its 
duration and market value of equity without projected cash flows 
which represent the Bank's share of the System's REFCorp and AHP 
obligations.

The Finance Board is expressly proposing this language again as even 
more appropriate in light of the Gramm-Leach-Bliley Act change to the 
REFCorp payment methodology.
    The Finance Board will accept comments on the proposed FMP 
amendments for the same 60-day comment period as the proposed 
regulatory amendments to parts 900, 910, and 941.

    By the Board of Directors of the Federal Housing Finance Board.

    Dated: December 14, 1999.
Bruce A. Morrison,
Chairman.
[FR Doc. 00-36 Filed 1-3-00; 8:45 am]
BILLING CODE 6725-01-P