[Federal Register Volume 66, Number 45 (Wednesday, March 7, 2001)]
[Proposed Rules]
[Pages 13688-13689]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-5474]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 932

[No. 2001-03]
RIN 3069-AB11


Unsecured Credit Limits for Federal Home Loan Banks

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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SUMMARY: On December 20, 2000, as part of its new capital rule, the 
Federal Housing Finance Board (Finance Board) approved new limits on 
the amounts of unsecured credit that a Federal Home Loan Bank (Bank) 
may extend to a single counterparty or group of affiliated 
counterparties. These new unsecured limits revised and codified the 
unsecured credit guidelines set forth in the Finance Board's Financial 
Management Policy (FMP). The Finance Board is, hereby, proposing 
amendments to the unsecured credit provisions of the capital rule to 
increase the limit on a Bank's unsecured credit exposure to government-
sponsored enterprises (GSEs).

DATES: The Finance Board will consider written comments on the proposed 
rulemaking that are received on or before April 23, 2001.

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

FOR FURTHER INFORMATION CONTACT: James L. Bothwell, Managing Director, 
(202) 408-2821; Scott L. Smith, Acting Director, (202) 408-2991; or 
Julie Paller, Senior Financial Analyst, (202) 408-2842, Office of 
Policy, Research and Analysis; or Thomas E. Joseph, Attorney-Advisor, 
(202) 408-2512, Office of General Counsel, Federal Housing Finance 
Board, 1777 F Street, N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Background

    On December 20, 2000, in accordance with the Gramm-Leach-Bliley 
Act, Pub. Law No. 106-102, 133 Stat. 1338 (Nov. 12, 1999) (GLB Act), 
the Finance Board adopted a final rule to implement the new capital 
structure that the GLB Act established for the Banks. See 66 FR 8262 
(Jan. 30, 2001). As part of the final capital rule, the Finance Board 
adopted new limits on the permitted amounts of a Bank's unsecured 
credit exposures to a single counterparty or a group of affiliated 
counterparties. Id. at 8318-19 (to be codified at 12 CFR 932.9). These 
new limits represent a revision and codification of the unsecured 
credit guidelines of Section VI of the FMP, Finance Board Res. No. 96-
45 (July 3, 1996), as amended by Finance Board Res. No. 96-90 (Dec. 6, 
1996), Finance Board Res. No. 97-05 (Jan. 14, 1997), and Finance Board 
Res. 97-86 (Dec. 17, 1997), which will remain in effect until these new 
limits take effect on July 2, 2001.\1\ During the comment period for 
the proposed capital rule, many commenters generally opposed the 
implementation of the unsecured credit guidelines in Sec. 932.9, but 
did not comment on the specific limits set in the rule, which are 
designed to address safety and soundness concerns related to the risk 
created by credit concentrations in a single counterparty or group of 
affiliated counterparties. See 66 FR 8301-02.
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    \1\ The Chairman of the Bank Presidents' Conference requested an 
extension of the March 1, 2001 effective date for complying with the 
new unsecured credit limits. In response, the Finance Board has 
waived the March 1, 2001 date by Resolution, dated February 28, 
2001, and has extended the date for compliance with Sec. 932.9 by 
120 days until July 2, 2001.
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    The new unsecured credit limits in 12 CFR 932.9 are more 
restrictive than those that are applied under the FMP. They allow the 
Banks, however, to extend unsecured credit to lower-rated 
counterparties than is now allowed under the FMP and will remove 
maturity constraints on extensions of unsecured credit that are 
contained in Section VI of the FMP. Before a Bank may extend unsecured 
credit to any counterparty (or affiliated counterparties) to which a 
Bank could not previously lend because of the credit rating 
restrictions or maturity limits in the FMP, the Bank must obtain the 
Finance Board's approval for the lending activity as a new business 
activity pursuant to 12 CFR Part 980. The new limits do not apply to 
obligations backed by the full faith and credit of the United States 
government, which is the case under the unsecured credit guidelines of 
the FMP. Section 932.9 also does not require a Bank to unwind positions 
that do not conform to the new requirements provided the credit was 
extended in accordance with the FMP before the effective date of the 
new rule.

II. Proposed Rule

    As discussed in the SUPPLEMENTARY INFORMATION section of the 
adopting release of the final capital rule, the Finance Board believes 
that the diversification of risk, particularly with regard to unsecured 
credit, promotes the safety and soundness of the Banks and that the 
specific limits adopted in 12 CFR 932.9 are necessary to address the 
increase in credit risk associated with concentrations of credit 
exposures. The limits are not unduly onerous \2\ and generally are 
consistent with those applicable to commercial banks. See 12 CFR Part 
32.
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    \2\ If extension of credit to GSEs are not included, at year-end 
2000, the Banks in aggregate had only just over $4.4 billion in 
unsecured extensions of credit that would be in excess of the limits 
set forth in 12 CFR Sec. 932.9 compared with a total unsecured 
extensions of credit to private counterparties of just over $84 
billion.
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    It has been suggested, however, that as applied to debt issued by 
the GSEs, the new limits may present problems for some Banks. Under the 
FMP, the Banks could maintain unsecured credit exposures with a single 
GSE in an amount equal to 100 percent of the Bank's capital. The new 
unsecured credit limits would treat GSEs like other private 
counterparties and base the unsecured credit limit on the long- or

[[Page 13689]]

short-term ratings assigned to the GSE by a Nationally Recognized 
Statistical Rating Organization (NRSRO). Generally speaking, GSEs 
currently receive the highest investment grade rating assigned by an 
NRSRO. For all such counterparties, a Bank's maximum allowable 
unsecured credit exposure under Sec. 932.9 cannot exceed 15 percent of 
the Bank's total capital or of the counterparty's regulatory capital, 
whichever amount is lower.
    Some Banks have indicated that, given the magnitude of the 
reduction in the allowable credit exposure to a GSE under Sec. 932.9, 
they will experience difficulty in developing new investment strategies 
to conform to these new limits. Since publication of the final 
unsecured credit rule, some Banks have indicated that GSE debt offers 
an attractive risk-return profile not available from other investments, 
especially in the immediate future. Some Banks also have suggested that 
GSEs are a better credit risk than other counterparties, even those 
counterparties with the highest investment grade ratings, and point to 
the premium over corporate debt at which GSE debt trades in the markets 
as an indication of the GSEs' special status. These Banks further claim 
that the new restrictions on their credit exposures to GSEs may result 
in greater investment in instruments with a lesser credit quality.
    In the SUPPLEMENTARY INFORMATION section of the final capital rule, 
the Finance Board noted that it ``may solicit additional comments 
regarding the appropriateness of the [unsecured credit] limits in 
future rulemaking and may consider revising them at that time.'' 66 FR 
8302. The Finance Board also recognizes that for some Banks, the 
magnitude of the reduction in the allowable unsecured credit limit 
applicable to GSEs could be disruptive and that, historically, GSEs 
have been viewed more favorably by debt markets than even the highest-
rated corporate debt issuers. Thus, the Finance Board is proposing to 
amend 12 CFR 932.9 to raise the limit on a Bank's unsecured extensions 
of credit to a GSE and is requesting comment and supporting analysis 
concerning the appropriate level for this new limit.
    It also has been suggested that the Finance Board amend 12 CFR 
932.9 to exclude from the unsecured credit limits the sale of Federal 
funds with a maturity of one day or less, or Federal funds sold under a 
continuing contract, as do commercial bank regulators. See 12 CFR Part 
32. The Finance Board requests comment on whether it should adopt such 
an exclusion, although it is not proposing to do so at this time. If 
commenters support such an exclusion, they should provide data 
indicating how the lack of such an overnight Federal funds exclusion in 
12 CFR 932.9 would negatively affect the Banks and should address why 
such an exclusion would not raise safety and soundness concerns.

III. Regulatory Flexibility Act

    The proposed 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 proposed rule, if promulgated as a final 
rule, will not have a significant economic effect on a substantial 
number of small entities.

IV. Paperwork Reduction Act

    The proposed rule does not contain any collections of information 
pursuant to the Paperwork Reduction Act of 1995. See 33 U.S.C. 3501 et 
seq. Therefore, the Finance Board has not submitted any information to 
the Office of Management and Budget for review.

    Dated: February 28, 2001.

    By the Board of Directors of the Federal Housing Finance Board.
Allan I. Mendelowitz,
Chairman.
[FR Doc. 01-5474 Filed 3-6-01; 8:45 am]
BILLING CODE 6725-01-P