[Federal Register Volume 66, Number 153 (Wednesday, August 8, 2001)]
[Proposed Rules]
[Pages 41462-41474]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19852]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 925, 930, 931, 932, and 933

[No. 2001-17]
RIN 3069-AB06


Capital Requirements for Federal Home Loan Banks

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing 
a small number of modifications to the capital and related regulations 
that were adopted on December 20, 2000. Many of the changes were 
identified in response to an advance notice of proposed rulemaking 
(ANPR) relating to unforeseen issues that were not addressed by the 
final capital rule. In addition to proposing certain conforming 
amendments, the Finance Board is proposing to clarify that the Federal 
Home Loan Banks (Banks) may pay dividends on Class A stock from 
retained earnings, to provide Banks with discretion to prohibit members 
from transferring Bank stock, to define the phrase ``charges against 
the capital of the Bank'', to clarify the off-balance sheet conversion 
factors for commitments to make advances and commitments to acquire 
loans, to change the provision governing the membership termination 
date for members seeking to voluntarily withdraw from the Bank System, 
and to add a requirement that a Bank make certain disclosures to its 
members before its capital plan can be implemented. This proposal also 
addresses other issues arising under the capital rule that, based on 
the ANPR comments, appear to require additional explanation or 
clarification, even though no amendments to the regulations are being 
proposed.

DATES: The Finance Board will consider written comments on the proposed 
rulemaking that are received on or before September 7, 2001.

ADDRESSES: Send comments to: Elaine L. Baker, Secretary to the Board, 
by electronic mail at , or by regular mail to the Board, at the Federal 
Housing Finance Board, 1777 F Street, NW., Washington, DC 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; Ellen

[[Page 41463]]

Hancock, Senior Financial Analyst, (202) 408-2906; or Christina 
Muradian, Senior Financial Analyst, (202) 408-2584, Office of Policy, 
Research and Analysis; or Deborah F. Silberman, General Counsel, (202) 
408-2570; Neil R. Crowley, Deputy General Counsel, (202) 408-2990; 
Thomas F. Hearn, Senior Attorney-Advisor, (202) 408-2976; or Thomas E. 
Joseph, Senior Attorney-Advisor, (202) 408-2512, Office of General 
Counsel, Federal Housing Finance Board, 1777 F Street, NW., Washington, 
DC 20006.

SUPPLEMENTARY INFORMATION

I. Background

    The Gramm-Leach-Bliley Act, Pub. L. No. 106-102, 133 Stat. 1338 
(November 12, 1999) (GLB Act), amended the Federal Home Loan Bank Act 
(Bank Act) to change, among other things, the capital structure of the 
Banks from a ``subscription'' structure to one that includes both risk-
based and minimum leverage requirements. The GLB Act also required the 
Finance Board to prescribe uniform capital standards for the Banks and 
required each Bank to adopt and implement a capital plan consistent 
with provisions of the GLB Act and Finance Board regulations.
    In addition to approving the new capital regulations, the Finance 
Board adopted on December 20, 2000 a resolution directing its staff to 
develop an ANPR that would seek comment on any issues that could arise 
in the capital planning process, from actions of other regulatory 
bodies or from other events in the general economy that could affect 
the capital development of the Banks, and that could require further 
action by the Finance Board. Accordingly, on March 2, 2001, the Finance 
Board approved an ANPR to help identify issues or uncertainties that 
were not contemplated by, or fully addressed in, the final capital rule 
or that have arisen only after the Banks have begun to develop their 
capital plans. See 66 FR 14093 (March 9, 2001). In addition to 
soliciting information on unresolved issues, the ANPR also sought 
comment on two specific issues: (1) how best to pay dividends on Class 
A stock, given statutory language that could be read to create a 
property interest for Class B stock holders in retained earnings; and 
(2) whether additional consideration needed to be given to the question 
of capitalizing out-of-district assets.
    The Finance Board received 16 comment letters on the ANPR. Eight 
letters were from Banks, five from trade associations, and three 
letters were from Bank members, although two of the member comment 
letters were from the same member. The Finance Board has carefully 
considered all comments received on the ANPR. It is addressing below, 
however, only those issues that were not fully considered and resolved 
in the final capital rule, that have arisen since the Finance Board 
adopted the capital rule or that appear to require additional 
clarification or explanation. Some of the issues are addressed by 
proposing specific changes to the capital rule. In other cases, the 
Finance Board addresses the issues through a more complete explanation 
of current regulatory provisions.

II. Proposed Changes to the Regulations

    Voluntary withdrawal from membership. One Bank requested guidance 
for applying Sec. 925.26(b) and (c) of the Finance Board's rules in two 
specific situations. See 12 CFR 925.26(b) and (c). The Finance Board 
believes that the first issue raised by the commenter may best be 
addressed through a rule change, as is discussed below, while the 
second issue can be addressed by the Banks themselves in their capital 
plans.
    The first issue assumes that a member is required to hold Class B 
shares to support outstanding borrowing from a Bank and is required to 
hold Class A shares as a condition of membership. Under those 
circumstances, the Bank asked whether a member withdrawing from the 
Bank could redeem its Class A stock at the end of the six-month 
redemption period or must the member wait until the end of the five-
year Class B redemption period.
    As adopted, Sec. 925.26(b) sets the effective date of a member's 
termination as of the date on which the last of the applicable stock 
redemption period ends for the member's stock, whether the stock in 
question is held as a condition of membership, to fulfill an activity-
based stock purchase requirement or as excess stock, unless the member 
cancels its withdrawal notice before that date. Thus, this provision 
would appear to prevent the Bank from redeeming Class A stock at the 
end of the six-month redemption period because that stock would be 
required to be held as a condition of membership until the membership 
terminates at the end of the five-year redemption period for the 
member's outstanding Class B stock. Because the rule appears 
effectively to extend the redemption notice period for Class A stock in 
the situation described by linking the membership termination to 
activity-based stock purchase requirements, and thereby, may burden 
members unnecessarily, the Finance Board is proposing to change the 
regulation. Under the proposed change, the membership of an institution 
that has submitted a notice of withdrawal would terminate as of the 
date on which the last of the applicable stock redemption periods end 
for the stock that is held as a condition of membership, as that 
requirement is set out in the Bank's capital plan, unless the 
institution has cancelled its notice of withdrawal prior to that date. 
If adopted, the proposed change would, in situations like those 
described by the Bank, require the Bank to redeem the Class A shares 
that are held as a condition of membership at the end of six-months, 
unless a Bank's membership requirement also required a member to hold 
Class B stock. In most cases, however, the Finance Board believes that 
the proposed rule change would help assure that the redemption date for 
the Class A stock held as a condition of membership would correspond to 
the date on which the member's withdrawal became effective.
    The Bank also requested a clarification of the application of 
Sec. 925.26(c), to a member that continues to participate in an 
activity after filing a notice of withdrawal. Specifically, the Bank 
asked if the redemption period for any additional Class B stock bought 
to fulfill an activity stock purchase requirement would begin to run 
from the date that the original withdrawal notice was filed, from the 
date of purchase of the new Class B stock, or some other date.
    Under Sec. 925.26(c), as adopted, the receipt by the Bank of a 
member's notice to withdraw commences the applicable stock redemption 
period for all Bank stock held by the member that is not already 
subject to a redemption request. The regulation does not address when 
the redemption period would commence for Bank stock purchased after the 
notice to withdraw has been submitted (such as to support new advances 
taken by the member). The regulation currently sets a minimum standard 
for the commencement of the notice period, as required by the Bank Act. 
See 12 U.S.C. 1426(d)(1). To the extent that a Bank is concerned about 
the commencement of the redemption periods for stock purchased 
subsequent to the submission of the notice to withdraw, it can address 
this issue in its capital plan by specifying that the redemption period 
either automatically commences upon purchase of the stock or only after 
the member has filed a notice to redeem the stock. The Bank, however, 
could not deem the redemption period to begin earlier than the date of 
purchase of the stock (such as on the date the Bank received the notice 
to withdraw) because that would

[[Page 41464]]

effectively cut short the statutory redemption period for the stock.
    Alternatively, the redemption period may not be effectively 
lengthened either. For example, consider a member that holds only Class 
B stock, provides the Bank with a notice of withdrawal, and on the same 
day takes down a seven-year advance and purchases the additional Class 
B stock to support the advance. Five years after the notice of 
withdrawal, membership would terminate and all excess stock would be 
redeemed. The member, however, still would have an advance outstanding 
and still would hold stock that supports the advance. At the time of 
withdrawal, the member would have the option to hold the advance until 
maturity--in this case, another two years. If the institution makes the 
decision to hold the advance until maturity, the Bank would have to 
redeem the stock supporting the advance once the advance has been 
repaid, because the five-year redemption notice period would have 
elapsed two years earlier.
    The Finance Board does not believe that a change in Sec. 925.26(c) 
is required and intends to maintain the current flexibility provided in 
the rule, as outlined above.
    Dividends on Class A stock. In the ANPR, the Finance Board 
requested comments on whether, in light of the GLB Act provisions 
conferring an ownership interest in the retained earnings of a Bank in 
favor of the Class B stockholders, a Bank could pay dividends to its 
Class A stockholders from its retained earnings. The Finance Board 
expressed the view that Congress was unlikely to have intended that the 
retained earnings provisions would be applied in such a manner as to 
preclude the possibility of a Bank paying dividends on its Class A 
stock, and indicated that it was inclined to amend the capital 
regulations to permit the payment of dividends on Class A stock from 
the retained earnings of the Bank. See 66 FR at 14093-94.
    The Finance Board received comments from several Banks, all of 
which generally favored amending the regulations as necessary to permit 
the payment of Class A dividends from retained earnings. One Bank 
commented that the GLB Act should be construed as permitting dividends 
to be paid to Class A shareholders from retained earnings. Another Bank 
recommended that the GLB Act provisions giving Class B shareholders an 
ownership interest in the retained earnings be construed to mean that 
Class B shareholders get the retained earnings upon liquidation or the 
declaration of a dividend, but at all other times the board of 
directors is free to use the retained earnings in the ordinary course 
to pay an FHLBank's obligations, including the declared dividends on 
Class A Stock. A third Bank indicated that it plans to address any 
potential problem paying dividends on Class A stock from retained 
earnings by requiring all members to hold Class B stock; therefore no 
class of its members will be disadvantaged by a decision to pay 
dividends on Class A stock. That Bank further indicated that it would 
limit the amount of dividends paid on its Class A stock to the amount 
of its current earnings (presumably after they have been transferred to 
retained earnings), so that there would be no expropriation of retained 
earnings from a previous period by Class A shareholders. That Bank 
asked the Finance Board to clarify the conditions under which the Banks 
may be permitted to pay dividends on Class A stock.
    A fourth Bank concurred that there is no indication that Congress 
intended to deprive Class A shareholders of dividends when it granted 
ownership of retained earnings to the Class B shareholders, and 
recommended that the Finance Board permit a Bank to pay Class A 
dividends from current earnings that have been closed to the Bank's 
retained earnings account.\1\ Another Bank noted that under generally 
accepted accounting principles in the United States (GAAP) a Bank could 
pay Class A dividends from its current earnings before closing them to 
retained earnings, provided the Bank had given the Class A dividend a 
preferred status. If the Bank did not give the Class A stock such a 
dividend preference, however, it is not clear that paying such 
dividends from current net earnings would be permitted under GAAP.
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    \1\ Following that recommendation, however, would require the 
Finance Board to declare that current earnings that have been 
transferred to the retained earnings acount are not ``retained 
earnings'' for regulatory purposes, but continue to be current 
earnings despite the transfer. Such a change would require the 
Finance Board to create an accounting standard that varies from 
GAAP, which the Finance Board does not believe is necessary in order 
to achieve the same result.
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    The question about the use of retained earnings as a source of 
dividends for a Bank's Class A stock arises because of the 
interrelationship of three provisions of the Bank Act. One provision 
permits a Bank to pay dividends on its stock only from two sources: 
previously retained earnings and current net earnings. 12 U.S.C. 
1436(a). A separate provision, added by the GLB Act, provides that the 
holders of the Class B stock shall own the retained earnings of the 
Bank. Id. Section 1426(h)(1). Yet another provision authorizes the 
Banks to issue either, or both, Class A and Class B stock and to 
establish the ``terms, rights, and preferences including * * * 
dividends * * * of each class of stock * * * consistent with Finance 
Board regulations and market requirements.'' Id. Section 1426(c)(4)(B).
    The use of current earnings as a source of dividends (whether for 
Class A or Class B stock) is problematic because under GAAP a Bank must 
close its current earnings to its retained earnings account at the 
close of each accounting period. Although the previously retained 
earnings of a Bank are, by statute, a source for the payment of 
dividends, the GLB Act provisions conferring on the Class B 
stockholders an ownership interest in the retained earnings have 
created some uncertainty about whether a Bank may use its retained 
earnings to pay dividends on its Class A stock or only on its Class B 
stock. See id. Section 1426(h)(1). Read narrowly, this provision of the 
GLB Act could be construed to preclude a Bank from using its retained 
earnings--the ``property'' of the Class B stockholders--to pay 
dividends to the Class A stockholders, at least without the consent of 
the Class B stockholders. If the Finance Board were to endorse that 
view, however, it very well could preclude a Bank from paying any 
dividends on its Class A stock (assuming the Class A stock does not pay 
a preferred dividend, as noted above), which could effectively 
frustrate the clear intent of Congress to allow each Bank to determine 
whether to issue one or two classes of stock. If neither the retained 
earnings (due to the interest of the Class B stockholders) nor the 
current earnings (due to the requirements of GAAP) were available to 
pay dividends on the Class A stock, a Bank would have no other source 
under the Bank Act from which to pay dividends on its Class A stock.
    As noted above, there are other provisions of the GLB Act that 
suggest strongly that the Congress did not intend that the retained 
earnings provision should be read so narrowly as to preclude the 
payment of dividends on the Class A stock. For example, Congress 
provided that each Bank must include in its capital plan, among other 
things, provisions relating to the ``terms, rights, and preferences, 
including * * * dividends * * * of each class of stock issued by the 
bank, consistent with Finance Board regulations and market 
requirements.'' Id. Section 1426(c)(4)(B). That language clearly 
contemplates an intent that each Bank should be permitted to establish 
the dividend rights for each class of its capital stock, and to do so 
based on its perception of

[[Page 41465]]

what the ``market'' for its stock required, i.e., the terms, rights, 
and dividends that the members would require in return for purchasing 
each class of Bank stock.
    Given the intent of Congress to allow an individual Bank, subject 
to Finance Board regulation, to determine the dividend rights for any 
class of stock that it issues, it appears unlikely that the Congress 
also intended to preclude a Bank from paying any dividends on the Class 
A stock. Even if the Congress were to have intended that result, it is 
more likely that the Congress would have done so expressly, rather than 
indirectly by enacting a new provision that is somewhat at odds with a 
long-standing provision of the Bank Act regarding the available sources 
of dividends for Bank stock. Moreover, construing these provisions of 
the Bank Act in a manner that would effectively preclude the payment of 
dividends on the Class A stock could make it difficult, if not 
impossible, for a Bank to sell Class A stock to its members. That would 
be an absurd result, in light of the clear intent of the Congress to 
create a new capital structure for the Banks. For those reasons, the 
Finance Board believes that it should construe these provisions to 
allow the payment of dividends on Class A stock from retained earnings, 
as those amounts may be calculated under GAAP. Accordingly, the Finance 
Board proposes to amend Sec. 931.4 to state expressly that a Bank may 
pay dividends on both Class A and Class B stock from either of the 
sources specified in 12 U.S.C. 1436(a).
    Transfer of capital stock. One commenter requested that the Finance 
Board eliminate a member's right to transfer excess capital stock to 
another member (or prospective member) of that Bank. See 12 CFR 931.6. 
In the alternative, the commenter requested that the rule be amended to 
make such member-to-member transfers of Bank stock expressly subject to 
a Bank's approval. After considering this comment, the Finance Board is 
proposing to amend Sec. 931.6 to allow a Bank the option of generally 
prohibiting its members from transferring Bank stock and if a Bank 
chooses to allow transfers, making the transfers clearly subject to the 
Bank's approval.
    The limited circumstances set forth in Sec. 931.6 in which a member 
can transfer Bank stock to another member are broadly consistent with 
current practice for stock transfers that have long been allowed under 
the Bank Act. See 12 U.S.C. 1426(f)(1994). Further, as initially 
adopted, Sec. 931.6 effectively provides the Bank with the ability to 
nullify individual stock transfers by requiring that a member's 
transfer of Bank stock be recorded in the books and records of the Bank 
to be effective, although the provision does not expressly require a 
Bank to approve a specific transfer. This provision does not, however, 
allow a Bank generally to prohibit such transfers.
    Upon consideration of this comment, the Finance Board believes that 
it would be consistent with the discretion afforded a Bank in the GLB 
Act ``to establish standards, criteria, and requirements for the * * * 
transfer * * * of stock issued by that bank,'' id. Section 
1426(c)(5)(B), to allow a Bank, as part of its capital plan, either to 
prohibit any transfers of its stock among its members or to permit 
these transfers subject to the conditions currently set forth in 
Sec. 931.6. The Finance Board, therefore, is proposing to amend 
Sec. 931.6 accordingly and to make a conforming change to 
Sec. 933.2(e)(3). Under this proposed change, each Bank would be 
required to state in its capital plan whether a member may transfer 
capital stock of the Bank, and, if such transfers are allowed, to 
specify the procedures that a member must follow to effect the 
transfer, and to specify that any transfer may only be undertaken in 
the limited circumstances currently set forth in Sec. 931.6. The 
proposed amendment also expressly provides that a Bank, in its capital 
plan, may require a member to obtain the Bank's approval to effect the 
transfer of stock.
    Charges against capital. Seven Banks commented that the phrase 
``charges against the capital of the Bank'' as used in Sec. 931.8 was 
ambiguous. See 12 CFR 931.8. Commenters were unsure if the phrase 
referred to charges against any component of total or permanent 
capital, including retained earnings, or only to charges against the 
capital stock of a Bank. They contended that the latter meaning was 
more reasonable, especially from an operational standpoint, and should 
be applied.
    Section 931.8 specifies that a Bank may not redeem or repurchase 
capital stock without the written permission of the Finance Board if 
the Finance Board or the board of directors of the Bank determines that 
the Bank has or is likely to incur losses that result in or are likely 
to result in charges against the capital of the Bank. The prohibition 
of Sec. 931.8 applies even if the Bank would be in compliance with its 
regulatory capital requirements after the stock repurchase or 
redemption and for as long as the Bank continues to incur such charges 
or until the Finance Board determines that such charges are not 
expected to continue. This provision implements the requirements of 
Sec. 6(f) of the Bank Act, as amended by the GLB Act, which states 
that:

[i]f the Finance Board or the board of directors of a * * * [B]ank 
determines that the [B]ank has incurred or is likely to incur losses 
that result in or are expected to result in charges against the 
capital of the [B]ank, the [B]ank shall not redeem or repurchase any 
stock * * * without the prior approval of the Finance Board * * *

12 U.S.C. 1426(f).
    After further consideration, the Finance Board agrees that the 
phrase ``charges against the capital of the Bank'' as used in 
Sec. 931.8 should be clarified. The phrase is taken from 6(f) of the 
Bank Act, as amended by the GLB Act, but it is not defined in that 
provision or elsewhere in the statute. More generally, while the 
statute defines both ``permanent capital'' and ``total capital'', the 
term ``capital'' itself is not defined in the Bank Act. The Finance 
Board, however, believes that, given general principles of statutory 
construction, the purpose of the statutory provision and the regulatory 
scheme established by the Bank Act, the phrase ``charges against the 
capital of the Bank'' is more reasonably interpreted to mean a charge 
against the capital stock of a Bank.
    General rules of statutory constructions dictate that every word or 
clause in a statute should be given effect. See 2A Norman J. Singer, 
Statutes and Statutory Construction Sec. 46:06 (6th ed. 2000). If 
Congress intended the phrase ``charges against the capital of the 
Bank'' to mean a charge against any element of total and permanent 
capital, which would include retained earnings, a reference to a loss 
would be sufficient to trigger the applicable limitations in 6(f) of 
the Bank Act, and the addition of the phrase ``charges against the 
capital of the Bank'' would be redundant. To explain more fully, a Bank 
will experience a loss when its expenses exceed its income for a 
certain period so that the Bank records negative net income for that 
period. Negative net income, in turn, results in a decline in retained 
earnings, or put another way, any loss will result in a charge against 
retained earnings. If the phrase ``charge against the capital of the 
Bank'' were interpreted to mean a charge against any element of 
permanent or total capital, which would include retained earnings, a 
charge against the capital of the Bank would occur whenever a Bank 
experienced a loss. By requiring that a loss result in ``charges 
against the capital of the Bank'' before the applicable limitations in 
6(f) of the Bank Act are triggered, the statutory language appears to 
contemplate that ``charges against the capital of the Bank'' must

[[Page 41466]]

mean a charge against something other than retained earnings.
    More importantly, interpreting ``charges against the capital of the 
Bank'' to include a charge against retained earnings would seem 
inconsistent with other provisions in the statute. Specifically, the 
Bank Act authorizes the Banks to pay dividends from previously retained 
earnings, but contains no prohibition on paying such dividends if the 
Bank is or is about to incur a loss. See 12 U.S.C. 1436. It seems 
inconsistent, and without purpose, to interpret the statute to burden 
the Banks with obtaining Finance Board approval to redeem or repurchase 
stock if there is a loss but still allow the Bank to use retained 
earnings without restriction to pay dividends. By contrast, other 
limitations in the statute that are placed on retained earnings with 
the apparent purpose of preserving the Bank's total or permanent 
capital apply both to redemption and repurchase of capital stock and 
the payment of dividends. See 12 U.S.C. 1426(f) (no redemption or 
repurchase of capital stock if such action results in the Bank's 
failing to meet its capital requirements) and 12 U.S.C. 1426(h)(3) (no 
distribution of retained earnings if the distribution results in the 
Bank's failing to meet its capital requirements). In addition, it seems 
unreasonable to burden the Banks with the requirements of 6(f) of the 
Bank Act whenever the Banks experienced or were expected to experience 
even a small loss.
    Thus, the Finance Board believes that the phrase ``charges against 
the capital of the Bank'' should be interpreted to mean a charge 
against the capital stock of the Bank.\2\ To codify this 
interpretation, the Finance Board is proposing to define ``charges 
against the capital of the Bank'' in Sec. 930.1 to mean an other than 
temporary decline in the Bank's total equity that causes the value of 
total equity to fall below the Bank's aggregate capital stock amount. 
This definition is based on the criteria set forth in the Industry 
Audit Guide published by American Institute of Certified Public 
Accountants (AICPA) for evaluating impairment of Federal Home Loan Bank 
and Federal Reserve Bank stock. See Audits of Banks, Investment in Debt 
and Equity Securities, FHLB or Federal Reserve Bank Stock, Secs. 5.97-
5.101 (AICPA May 1, 2000). The Finance Board drew on the capital stock 
impairment criteria because 6(f) of the Bank Act, based on the title of 
the provision, appears intended to address capital impairment. Further, 
by drawing on the AICPA criteria, the Finance Board is relying on 
industry guidance that is applied in a manner consistent with GAAP. It 
has generally been the Finance Board's goal to be consistent with GAAP 
to the extent possible in its capital regulations. See 65 FR 43408, 
43420 (July 13, 2000) (proposed capital rule); and 66 FR at 8281-82. In 
evaluating whether a decline in value of a Bank's equity is other than 
temporary, as that term is used in the proposed definition of ``charges 
to capital'', the Finance Board would consider, and would expect the 
Banks to consider the AICPA's criteria for evaluating impairment of 
Bank stock.
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    \2\ In practical terms, the Bank's regulatory capital under the 
Bank Act and the current Finance Board rules consists of the paid-in 
value of Bank stock and retained earnings. If a Bank experienced a 
loss that resulted in a charge against its capital stock, the loss 
would have already been more than the Bank's retained earnings so 
that the Bank would have no retained earnings from which to pay 
dividends. Thus, the statutory scheme imposes a de facto prohibition 
on the payment of dividends in this situation while Sec. 6(f) of the 
Bank Act provides the Finance Board with discretion to impose 
similar prohibition on the redemption and repurchase of stock.
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    Off-balance sheet credit conversion factors. Section 932.4(f) 
requires the Banks to convert all off-balance sheet credit exposures 
into equivalent on-balance sheet credit exposures or credit equivalent 
amounts, determine the type of the item, and then apply the appropriate 
credit risk percentage requirement to estimate the instrument's credit 
risk capital charge. See 12 CFR 932.4(f). Section 932.4(f)(1) allows 
the Banks to use Finance Board-approved internal models to convert some 
or all off-balance sheet credit exposures into on-balance sheet credit 
equivalents. For Banks that lack appropriate internal models, the 
regulation provides credit conversion factors for off-balance sheet 
items in Table 2 of part 932.
    In adopting Table 2, the Finance Board divided a category that had 
been proposed as ``commitments to make advances or other loans'' into 
two categories one of which covered commitments to make advances and 
the other which covered commitments to acquire loans. This change 
recognized that under Acquired Members Asset (AMA) programs, the Banks 
may enter into certain commitments to acquire loans that may be 
recorded as off-balance sheet items. Like the former category, the new 
categories of commitments were given a 100 percent conversion factor.
    The Finance Board received comments from seven Banks on the off-
balance sheet credit conversion factor for commitments to acquire 
loans. Generally, the commenters expressed concern that ``master 
commitments'' to acquire loans under AMA programs would appear to have 
a 100 percent conversion factor even though such commitments were not 
an accurate indicator of future acquisitions. Commenters suggested that 
the Finance Board conform its requirements to those of other federal 
bank regulators, who would apply a 100 percent conversion factor only 
to commitments subject to ``certain drawdown,'' (i.e., commitments that 
an institution is legally obligated to honor at a specified future date 
no matter what change may have occurred in the counterparty's financial 
situation). Where there is uncertainty as to the amounts to be 
delivered under particular loan commitments, and in recognition that 
such commitments are often unfulfilled, the other federal bank 
regulators would apply a 50 percent conversion factor for commitments 
with a maturity of greater than one year, and zero percent for such 
commitments with maturities of one year or less.\3\ An exception is 
provided for other commitments that are unconditionally cancelable or 
that effectively provide for automatic cancellation due to the 
deterioration in a borrower's creditworthiness, at any time without 
prior notice. The credit conversion factor for such commitments is 
zero.
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    \3\ The Basel Committee on Banking Supervision (Basel Committee) 
is proposing to change the credit conversion factor for commitments 
with maturities of one year or less to 20 percent. See Basel 
Committee ``The Standardized Approach to Credit Risk, Supporting 
Document in the New Basel Capital Accord 10'' (Jan. 2001). In its 
capital rule, the Finance Board adopted the approach that was 
eventually put forth in the proposed Basel Accord of a 20 percent 
credit converion factor for commitments with maturities of one year 
or less, subject to an exception for commitments that are 
unconditionally cancelable or that effectively provide for automatic 
cancellation due to the deterioration in a borrower's 
creditworthiness.
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    Because it was generally the intent of the Finance Board to conform 
to the extent possible its credit risk charges to the Basle Accord as 
currently incorporated by the federal bank regulatory agencies, the 
Finance Board is proposing to revise the credit conversion factors of 
Table 2 so that the 100 percent credit conversion factor applies only 
to commitments subject to certain drawdown. Further, the Finance Board 
is proposing to define certain drawdown to mean a legally binding 
agreement that commits the Bank to make an advance or to acquire a 
loan, at or by a specified future date.
    Because, as noted by one Bank, AMA master commitments to acquire 
loans, in general, appear to be effectively cancelable by either party, 
it appears that most, if not all AMA master commitments, would not be 
commitments subject to certain

[[Page 41467]]

drawdown. Moreover, they appear to be eligible for the exception 
provided in Sec. 932.4(f)(2), which applies to commitments that are 
unconditionally cancelable or that effectively provide for automatic 
cancellation due to the deterioration in the borrower's 
creditworthiness, and, therefore, to have a credit conversion factor of 
zero percent. Likewise, advance commitments that are unconditionally 
cancelable or that effectively provide for automatic cancellation due 
to the deterioration of the borrower's credit worthiness, at any time 
by the Bank without prior notice, also would not be subject to certain 
drawdown and would be eligible for a credit conversion factor of zero 
percent under the exception in Sec. 932.4(f)(2).
    Disclosure to members. As part of its efforts to provide assistance 
to the Banks in the preparation of their capital plans, the Finance 
Board transmitted to the Bank Presidents at the end of May, 2001, a 
package of staff guidance materials (Guidance) consisting of: (1) A 
series of checklists for consistency with the capital regulations; (2) 
a description of materials that could be submitted to support a 
determination of capital plan feasibility and approval of Risk 
Assessment Procedures and Controls; and (3) Bank System level review 
procedures. One aspect of item (2) describes materials that would best 
demonstrate feasibility of the implementation of the Bank's capital 
plan, as required by Sec. 933.2(g) of the Finance Board's rules. 12 CFR 
933.2(g). The Guidance notes that the Finance Board will evaluate the 
extent to which the Bank's members have been provided with sufficient 
information about the costs of membership and the desirability of Bank 
services under the capital plan, and that such information will be used 
to establish, to the extent possible, the degree of confidence that may 
be placed in the capital plan's assumptions regarding the size and 
make-up of the Bank's post-conversion membership base, pro-forma 
financial statements and the ability of the Bank to adequately 
capitalize its activities to verify that the capital plan can be safely 
implemented.
    The Guidance indicates that the Finance Board will review materials 
and communications made available by the Banks to their members for the 
quality of information provided regarding a number of issues, 
including: (1) Adequate description of the member's minimum investment 
requirements; (2) sufficient information to describe whether the 
capital requirements favor some members over others, or whether certain 
activities are priced to encourage or discourage member participation; 
(3) sufficient description of the Bank's dividend policy, including 
discussion, as appropriate, of any risk factors that could adversely 
affect dividends, and of the potential impact of different member 
leverage and risk-based capital requirements on return on equity; (4) 
description of the Bank's current operating and financial condition, 
including material issues that bear on the future operations of the 
Bank; and (5) description of any changes in products, activities and 
strategies contemplated in the Bank's capital plan or strategic plan.
    As the Guidance was being developed, and even after the Guidance 
was transmitted to the Banks, a number of the Banks have requested 
clarification with respect to the type and amount of communications 
they should or will be required to provide to members in connection 
with their capital plans. The Finance Board was not inclined initially 
to impose specific disclosure requirements on the capital plan process, 
choosing instead to leave the entire member outreach process to the 
discretion of the Banks. Given that the use of disclosure documents can 
be a valuable tool in any member outreach program, given that the Banks 
have continued to ask for assistance in this area, and given that the 
quality of disclosure on a number of important issues will play a 
critical role in the Finance Board's review of the capital plans, the 
Finance Board has now come to believe that there is merit in 
prescribing a baseline of required disclosure that would help the Banks 
meet the criteria established in the Guidance. The Finance Board 
believes also that it is appropriate to look to the disclosure 
standards established by the Securities and Exchange Commission (SEC) 
as the model for any disclosure requirements that it includes in its 
rules, and it has done so in drafting proposed Sec. 933.5.
    The proposed rule first would require that no capital plan become 
effective until disclosure meeting the requirements of Item 11(a) 
through (d) and Item 12(a) through (e) of Schedule 14A of the SEC's 
proxy rules (17 CFR 240.14a-101, Items 11 and 12) (Proxy Statement 
Disclosure) and of Sec. 933.5(b) of the proposed rule has been provided 
to members. Finance Board rules establish the effective date of a 
Bank's capital plan as the date on which the Bank first issues any 
Class A or Class B stock. See 12 CFR 931.9(a).
    Items 11 and 12 of Schedule 14A are usually thought of as mutually 
exclusive provisions--Item 11 requires disclosure regarding 
transactions in which action is to be taken with respect to the 
authorization or issuance of securities otherwise than for exchange of 
outstanding securities of the issuer; Item 12 requires disclosure 
regarding transactions in which action is to be taken with respect to 
the modification of any class of securities of the issuer, or the 
issuance or authorization for issuance of securities of the issuer in 
exchange for outstanding securities of the issuer. Because of the 
unique nature of the Banks and of this capitalization, the transactions 
that will occur upon implementation of the Banks' capital plans are 
something of a hybrid. Rather than try to characterize the transactions 
as one or the other, Sec. 933.5(a) of the proposed rule contemplates 
that the appropriate disclosure from both items would be provided, such 
as: the title and amount of securities ``authorized'' under the capital 
plan (Item 11(a)); the information required by Item 202 of Regulation 
S-K of the SEC's regulations (17 CFR 229.202) (a description of 
dividend rights, and other rights, terms and preferences of the stock) 
(Item 11(b)); a description of any material differences between the 
outstanding securities and the ``new'' securities in respect of any 
Item 202 of Regulation S-K matters (Item 12(b)); the reasons for the 
transaction and the general effect upon the rights of existing security 
holders (Items 11(d) and 12(c)); and a brief outline of any other 
material features of the capital plan (Item 12(e)).
    Section 933.5(b)(1)(i) of the proposed rule would require 
disclosure of financial information that is in scope, form and content 
consistent with the requirements of the SEC's regulations S-X and S-K 
(17 CFR parts 210 and 229). The proposed rule also would require 
disclosure of pro forma financial information related to the 
implementation of the capital plan, consistent with that referenced in 
the Guidance. Proposed Sec. 933.5(b)(1)(ii) would require disclosure of 
quarterly pro forma balance sheets and income statements covering two 
years from the ``as of'' date (next-to-latest quarter or latest 
quarter-end prior to submission of the capital plan) or, at a minimum, 
six quarters from the expected date of conversion to the new capital 
stock, whichever time period is greater, in detail sufficient to 
illustrate changes in the Bank's capital structure, dividends, product 
volumes, investment volumes, new business lines, and risk profile. 
Section 933.5(b)(1)(iii) of the proposed rule would require disclosure 
of the pro forma risk-based capital requirement for the ``as of'' date 
and for the quarterly periods reflected pursuant to proposed 
Sec. 933.5(b)(1)(ii), if not already included

[[Page 41468]]

in the pro forma balance sheet. Disclosure of the assumptions 
underlying the pro forma financial information, and the bases for these 
assumptions, would be required by Sec. 933.5(b)(1)(iv) of the proposed 
rule.
    Any of the financial information required by proposed 
Sec. 933.5(b)(1) may be incorporated by reference into the disclosure 
document chosen by the Bank, provided the information being 
incorporated is contained in an annual or quarterly Bank or Bank System 
report, or in information filed with the Finance Board as a part of the 
capital plan approval process, and the disclosure document identifies 
the information being incorporated by reference. See 
Sec. 933.5(b)(1)(E) of the proposed rule. If the Bank is incorporating 
financial or business information by reference from the Bank's or the 
System's annual or quarterly financial reports or from information 
filed with the Finance Board along with the capital plan, the Bank also 
must provide a name, address and telephone number to which members must 
make requests to obtain the incorporated information without charge to 
them upon written or oral request. Similarly, the Bank is required by 
proposed Sec. 933.5(b)(3) to state the name, address and telephone 
number where members may direct written or oral requests for a copy of 
the capital plan and any other instrument or document that defines the 
rights of the member/stockholders. Section 933.5(b)(2) of the proposed 
rule requires a Bank to fully describe any amendments anticipated to be 
made to its by-laws, policies or other governance documents as a result 
of the implementation of the capital plan, and Sec. 933.5(b)(4) of the 
proposed rule requires a Bank to include a brief statement as to the 
anticipated accounting treatment and the federal income tax 
consequences of the transaction. This information is all required to be 
provided to the members without charge to them.
    The Finance Board is not prescribing a form to be used by the Banks 
in providing the required disclosure to members. The full range of 
possible formats is available--proxy statements (if the Bank is 
choosing to seek a member vote), information statements, letters, 
brochures--and the Bank is free to make use of whatever format it 
believes is appropriate.
    The Finance Board is also proposing that members be provided all 
disclosures that would be required under Sec. 933.5 of the proposed 
rule at least 20 days prior to the intended effective date of a Bank's 
capital plan. In thinking about models for a suitable timeframe, the 
Finance Board once again looked to the securities laws for help, and 
specifically to the proxy statement analog. Many state corporate codes 
impose a meeting notice or proxy statement delivery requirement minimum 
of ten days on state-chartered business corporations. For example, the 
Delaware General Corporate Code states that written notice of any 
meeting shall be given not less than 10 nor more than 60 days before 
the date of the meeting to each security holder entitled to vote at the 
meeting. See 8 Del. C. Section 222 (1999). This notice typically is 
transmitted with the proxy statement. Furthermore, under Regulation 14C 
of the SEC's proxy rules, in connection with a meeting or action for 
which proxies are not being solicited, delivery of an information 
statement is required at least 20 calendar days prior to the meeting or 
prior to the earliest date on which the action may be taken. See 17 CFR 
240.14c-2(a) and (b).
    The reason for a minimum information delivery requirement is to 
allow shareholders adequate time to consider the issues involved in the 
actions being taken. Generally speaking, the more complex or essential 
to the life of the corporation the action is, the longer the prior 
delivery period would be to be deemed reasonable. So, while ten days 
would be adequate time for shareholders to consider a slate of 
directors for an uncontested election, shareholders are required to be 
given a minimum of 20 days to study the implications of a corporate 
acquisition under the SEC's proxy rules, even if no vote is required. 
Id. Sec. 240.14c-2(b).
    The Finance Board believes that the implementation of the new 
capital structures for the Banks would generally be considered an issue 
of importance to Bank members. The Finance Board also believes that 
delivery of the required disclosure at least 20 days prior to the 
effective date of a capital plan, would provide a member with 
reasonable opportunity to opt out of the ``conversion'' under the 
capital plan if the member so desired while not unreasonably delaying 
the Bank's implementation of the capital plan once the capital plan had 
been approved by the Finance Board. It should be noted that the 
proposed rule provides that all required disclosure ``shall be 
transmitted, sent, or given to members'' at least 20 days prior to the 
effective date of a Bank's capital plan; therefore, the disclosure 
material does not have to be in members hands 20 days prior to the 
capital plan's effective date. However, it is the Finance Board's 
intent that the Banks choose a reasonably expeditious form of 
transmission for the disclosure material so as not to render the 20-day 
period a nullity. Regular, first class mail is presumed, but other 
reasonably prompt methods of distribution may be used instead of 
mailing. The Finance Board requests comment on whether a longer or 
shorter time period may be more reasonable than the 20 days now 
proposed in Sec. 933.5(a).
    Finally, the Finance Board wishes to stress that these provisions 
are being proposed primarily to add consistency, clarity and precision 
to the regulations. It is not the Finance Board's intention to impose 
liability under the federal securities laws on the Banks, nor to create 
any private right of action. Therefore, the Finance Board has included 
proposed Sec. 933.5(c) to make clear that nothing in Sec. 933.5 would 
create or be deemed to create any rights in any third party.
    Conforming changes. The Finance Board is also proposing several 
conforming changes. It is proposing to amend the heading in 12 CFR 
932.4(d) to conform to other paragraph headings in that section and is 
proposing to correct in 12 CFR 932.4(e)(2)(ii)(E) a reference to 
another section of its rules. The Finance Board is also proposing to 
revise 12 CFR 925.27(c), to make clear that an involuntarily terminated 
member may continue to receive dividends on its stock until the stock 
is either redeemed or repurchased. The term ``repurchased'' was 
inadvertently omitted from this provision as adopted.

III. Discussion of Other Issues

    Out-of-district assets. In the ANPR, the Finance Board specifically 
requested comment on how the Banks could capitalize investments in the 
assets of another Bank (e.g., the purchase of a participation interest) 
or in assets acquired from the member of another Bank (e.g., Acquired 
Member Assets (AMA)). The Finance Board noted that such ``out-of-
district'' assets may present special problems for capitalization, 
especially with regard to the risk-based capital requirements, because 
the GLB Act and the Finance Board rules required a Bank to sell its 
stock only to its members. See 66 FR at 14094.
    Three Banks and one member institution commented on this matter.\4\

[[Page 41469]]

Two of the Banks believed that no action needed to be taken to address 
capitalizing out-of-district assets. One of these two Banks noted that 
a Bank could capitalize out-of-district assets in the same manner as it 
capitalized other investments that did not have a nexus with a member, 
and the other Bank stated that it had no problem capitalizing the out-
of-district assets on its books. The third Bank suggested that a change 
to the Finance Board's rule be made to allow a Bank that purchased 
assets from a member of another Bank to sell Class B stock to that 
member even though the membership resided in another district. The 
commenter believed that the stock should be non-voting and that its 
sale should be allowed only upon the approval of the Bank in which the 
membership of the seller-institution resided.
---------------------------------------------------------------------------

    \4\ One national and several state trade associations submitted 
comments urging the Finance Board to amend 12 CFR 933.2(b) to 
require all Banks to adopt activity-based stock purchase 
requirements that would apply to AMA acquired from the Bank's 
members. These comments did not specifically concern the question of 
capitalizing out-of-district assets but involved the question of the 
Finance Board mandating specific activity stock purchase 
requirements. In the SUPPLEMENTARY INFORMATION section of the 
adopting release for the final capital rule, the Finance Board 
stated that while a Bank had to require its members to purchase 
stock as a condition of conducting business with it, the 
determination of how to structure the minimum investment requirement 
was to be left to the Banks. See 66 FR at 8275-76. Thus, in 
considering the final capital rule, the Finance Board decided not to 
require mandatory activity-based stock purchase for AMA and sees no 
reason to reconsider the issue at this time.
---------------------------------------------------------------------------

    The member institution generally opposed allowing a Bank to acquire 
out-of-district assets arguing that such investments shifted risks from 
the out-of-district seller to the Bank members. The member also opposed 
capitalizing out-of-district assets through voluntary stock purchases 
because these purchases could create distinctions between owners and 
users of the Bank System, and ultimately raise safety and soundness 
concerns because non-user owners would be more likely to leave the 
system in times of financial stress.
    Based on these comments, the question of capitalizing out-of-
district assets does not appear to raise issues that are immediately 
pressing. As the two commenters noted, out-of-district assets are 
similar to, and can be capitalized in the same manner as, any other 
Bank investment that does not have a direct nexus with a Bank member. 
Further, it does not appear that the Banks' current investments in out-
of-district assets are raising safety and soundness concerns or 
changing the nature of the Bank System along the lines described by the 
member institution in its comments. The Finance Board also believes 
that it is at best unclear whether the suggestion that it allow the 
conditioned sale of Class B stock to members of another district would 
be consistent with the statutory dictates that a Bank's stock only be 
held by members of that Bank. See, 12 U.S.C. 1426(a)(4)(D) and 
1426(c)(5)A). Because there appears to be no immediate concern with 
regard to capitalizing out-of-district assets, however, the Finance 
Board has determined that no action on this matter need be taken at 
this time.
    Computation of voting rights. Four Banks sought clarification about 
how the computation of the maximum number of votes that a member may 
cast in an election of directors is conducted, particularly if a Bank 
has issued both Class A and Class B stock. Under section 7(b) of the 
Bank Act, in an election of directors for a particular state, each 
member in that state is permitted to cast one vote for each share of 
Bank stock that it owned as of the record date, subject to a statutory 
cap. Id. Section 1427(b). The cap is calculated as being equivalent to 
the average number of shares of stock that each member in that state 
was required to own as of the record date. If a Bank has issued both 
Class A and Class B stock, the current regulations require that the 
Bank calculate the statutory cap separately for each class of 
outstanding Bank stock. 12 CFR 915.5(b).
    Because it is possible that some members of a Bank that has issued 
both Class A and Class B stock might not own both classes of stock as 
of the record date, the commenters questioned whether the Bank should 
calculate the average number of shares outstanding by using as the 
denominator all of the members that are located within a particular 
state or just the total number of members within that state that own 
the particular class of stock as of the record date. The Finance Board 
believes that the statutory language, which refers to the amount of 
stock ``required * * * to be held'' by the ``members of such bank 
located in such State,'' requires that the calculation of the state 
averages be done based on the total number of members located in the 
particular state, regardless of whether certain of those members own 
both classes of stock. Because the Bank Act gives each Bank 
considerable latitude in establishing the minimum stock purchase 
requirements to be imposed on each of its members, it is possible that 
a capital plan could impose a stock purchase requirement of ``zero 
shares'' on certain of its members for one class of stock. For example, 
if a capital plan were to require a member to purchase Class A stock 
for membership purposes and to purchase Class B stock for activity 
purposes, any member that had no outstanding advances or other business 
activities as of the record date would have a stock purchase 
requirement for the Class B stock of ``zero shares''. Under section 
7(b) of the Bank Act, the Banks must use the amount of stock ``required 
to be held'' by each member in calculating the average stock holdings 
for each state. Even though the new capital provisions adopted by the 
GLB Act allow for the possibility that the amount of a particular class 
of stock that is ``required to be held'' by a particular member may be 
zero in certain circumstances, that possibility alone does not justify 
disregarding the ``required to be held'' language in the Bank Act. 
Accordingly, the Finance Board is not proposing to amend its 
regulations to exclude from the calculation members who happen to own 
no shares of a particular class of stock as of the record date. In 
order to avoid any uncertainty on this issue, however, the Finance 
Board is taking this opportunity to make clear that the state-by-state 
calculation of the average stock ownership is to be conducted using in 
the denominator the number of members that were located in the 
particular state as of the record date.
    The following example illustrates how the voting rights should be 
computed in an election of directors for a Bank that has issued both 
Class A and Class B stock but where some members do not own both 
classes of stock. Assume that a Bank were to have 100 members located 
in a particular state, each of which each owned various amounts of 
Class A stock, but only 60 of which also owned shares of Class B stock. 
Assume further, that the amount of Class B stock required to be held by 
those 60 members varies from member to member, but in the aggregate 
totals 800 shares. When computing the average number of Class B shares 
required to be held by the members in that state, the denominator would 
be 100 (representing the 100 members located in that state) and the 
numerator would be the aggregate amount of Class B stock required to be 
held as of the record date, which would be 800 shares. Thus, the 
maximum number of votes that any one of the 60 members from that state 
could cast based on its Class B stock ownership would be 8 votes (800 
shares  100 members = 8 shares). Any member required to hold 8 
or fewer shares of Class B stock as of the record date would be 
unaffected by the cap, but any other members required to hold more than 
8 shares of Class B stock could cast no more than 8 votes in the 
election of directors, based on their Class B stock ownership. To the 
extent that those 60 members also were required to hold shares of Class 
A stock as of the record date, they could cast a number of votes based 
on their Class A

[[Page 41470]]

stock, up to the average amount of Class A stock required to be held by 
all of the members in that state. Each of the other 40 members in that 
state that own no Class B stock could participate in the election based 
on the amount of Class A stock that each was required to hold, subject 
to the statutory cap for the average amount of Class A stock required 
to be held, which would be calculated as of the record date in the 
manner described above.
    Discretionary redemption of a member's excess stock. Five Banks 
requested clarification of the requirements for redemption of excess 
stock. See 12 CFR 931.7(a). These commenters stated that Sec. 931.7(a) 
could be read to prevent a Bank from repurchasing a member's excess 
stock prior to the end of the applicable notice period (i.e., six 
months for Class A stock and five years for Class B stock) if a member 
has filed a notice to redeem the excess stock. They believed such an 
interpretation was contrary to the provisions of the Bank Act. One 
commenter also stated that Sec. 931.7(a) should be revised to permit a 
Bank to redeem stock held as a membership requirement prior to the 
expiration of the required notice period upon the member's filing of a 
notice to withdraw from membership.
    The commenters also stated that Sec. 931.7(a) appeared to require a 
Bank to redeem a member's excess stock at the end of the required 
notice period. They believed that such an interpretation was contrary 
to section 6(e)(1) of the Bank Act, 12 U.S.C. 1426(e)(1), which they 
interpreted as providing a Bank with discretion to decline to redeem 
excess stock. Several of the commenters expressed concern that a 
mandatory redemption requirement would undermine the reasoning of the 
Internal Revenue Service's ruling allowing tax deferred treatment of 
dividends paid out as Bank stock, and would result in the loss of tax 
deferred treatment for these stock dividends See I.R.S. Rev. Rul. 90-98 
(Nov. 26, 1990).
    After considering these comments, the Finance Board believes that 
it should provide additional explanation concerning the redemption and 
repurchase provisions of the Bank Act and the Finance Board rules.\5\ 
The Finance Board also has concluded, however, that no changes to 
Sec. 931.7(a) are needed.
---------------------------------------------------------------------------

    \5\ While Sec. 6 of the Bank Act, 12 U.S.C. 1426, does not 
specifically define the terms redemption and repurchase, Sec. 930.1 
of the Finance Board rules defines redemption to mean a Bank 
acquisition of its outstanding Class A or Class B stock at par value 
following the expiration of the six-month or five-year statutory 
redemption period, respectively for the stock, and defines 
repurchase to mean the acquisition by a Bank of excess stock prior 
to the expiration of the six-month or five-year redemption period 
for the stock. 12 CFR 930.1.
---------------------------------------------------------------------------

    First, the redemption and repurchase rules do not prohibit a Bank 
from repurchasing excess stock for which a member has already filed a 
redemption notice as some commenters seem to fear. Section 6(e)(1) of 
the Bank Act states that ``a Bank, in its sole discretion, may redeem 
or repurchase, any shares of Class A or Class B stock issued by [it] 
and held by a member that are in excess of the minimum stock investment 
required of that member.'' In the Finance Board's view, this provision 
provides a Bank with the discretion either to repurchase a member's 
excess stock or to wait for the end of the applicable notice period to 
redeem such excess stock. This discretion is fully captured in 
Sec. 931.7(b) of the Finance Board's rules, which states that a ``Bank, 
in its discretion and without regard to the applicable redemption 
periods, may repurchase from a member any outstanding Class A or Class 
B capital stock that is in excess [of the member's minimum investment 
requirement].'' 12 CFR 931.7(b). Section 931.7(b) does not limit the 
Bank's right to repurchase stock only to those shares of excess stock 
for which a member has not filed a notice of redemption. Thus, a Bank 
already has the discretion to repurchase any excess shares of stock 
without regard to the notice period, whether or not a member has filed 
a notice to redeem such stock, and no further changes need to be made 
to Sec. 931.7(a) to provide this right. The right to repurchase excess 
stock, however, would be subject to other applicable limitations in the 
Bank Act, the capital regulations and a Bank's capital plan, including 
those in Secs. 931.7(c) and 931.8 of the Finance Board rules, 12 CFR 
931.7(c) and 931.8.
    Second, the Finance Board wishes to reiterate that Sec. 931.7(a) 
requires that a Bank redeem stock at the end of the statutory 
redemption, except if the limitations set forth in Secs. 931.7(c) and 
931.8 of the Finance Board rules apply. Before adopting the final 
capital rule, the Finance Board considered the question of whether the 
Bank Act provided a Bank with the discretion to deny a redemption 
request. The Finance Board concluded that:

[i]t is not apparent from the GLB Act that a Bank would have the 
authority to deny a redemption request if the capital of the Bank 
would not become impaired by the redemption or if the Bank would 
remain in compliance with its regulatory capital requirements.

66 FR at 8279. Moreover, as discussed above, section 6(e)(1) of the 
Bank Act appears to provide the Bank with the discretion to choose 
between either repurchasing a member's excess stock or waiting to 
redeem the excess stock at the end of the statutory notice period, 
which begins to run only if a member files a notice to redeem the 
excess stock. In addition, the Finance Board notes that under the pre-
GLB Act regulations and procedures, the term ``redemption'' as used in 
the I.R.S. Rev. Rul. 90-98 and relevant court cases dealing with the 
tax status of Bank stock dividends, see e.g., Colonial Sav. Ass'n v. 
IRS, 854 F.2d 1001 (7th Cir. Aug. 1988) and Western Sav. Fed. Sav. and 
Loan Ass'n v. IRS, 880 F.2d 1005 (8th Cir. July 27, 1989), could refer 
to either the immediate acquisition by the Bank of excess stock at the 
request of the member or the acquisition of the required stock that was 
held by members at the end of the statutory waiting period after a 
member withdrew from the Bank System. As already discussed, under the 
GLB Act amendment and the rules adopted to implement those amendments, 
these acquisitions are now each separately identified, with the former 
transaction similar to what is now called a repurchase, and the latter 
transaction falling into the category of a redemption, of Bank stock. 
See, note 5, supra. Repurchase of excess stock remains solely at the 
discretion of the Bank, and, unlike under the pre-GLB Act procedures, 
redemption of purely excess stock at the request of the member is now 
subject to a mandatory waiting period of six-months for Class A stock 
or five-years for Class B stock. It is unclear whether the imposition 
of a mandatory waiting period would mean that the member's right to 
redeem its stock as set forth in 931.7(a) provides the member with a 
meaningful election to receive stock dividends in either cash or stock 
form, as appears to be necessary for Bank stock dividends to be 
taxable. Given these considerations, the Finance Board declines to make 
changes to Sec. 931.7(a) to allow redemption of excess Bank stock to be 
at the discretion of a Bank.
    The Finance Board also declines to adopt the commenter's suggestion 
to revise Sec. 931.7(a) to allow a Bank to repurchase stock held 
pursuant to a membership requirement upon the filing of a notice to 
withdraw from membership and prior to the expiration of the required 
notice period, because this change appears to be contrary to the 
statute. The GLB Act allows only excess stock to be repurchased prior 
to the end of the statutorily imposed notice periods. Under the 
statutory scheme as implemented by the Finance Board

[[Page 41471]]

rules, only stock held above levels required by a capital plan's 
minimum membership and activity based stock purchase requirements would 
be excess. See 12 CFR 930.1 (defining excess stock). More importantly, 
the statute clearly states that a member's submission of a notice of 
intent to withdraw from membership or its termination of membership in 
any other manner shall not, in and of itself cause any Bank stock to be 
deemed excess. See 12 U.S.C. 1426(e)(2). To adopt the suggested rule 
change, the Finance Board would in effect have to deem stock held as a 
requirement of membership as excess upon the member's filing of a 
notice to withdraw, an assertion that is contrary to the clear 
requirements of the Bank Act as amended by the GLB Act.
    The Finance Board also has received inquiries about whether stock 
held by a member of one Bank may be considered to be excess stock (and 
thus eligible for repurchase) whenever that institution merges into a 
member of another Bank. As noted above, the Bank Act expressly provides 
that the submission of a notice of withdrawal from membership or the 
termination of membership in any other manner (such as through a merger 
into a member of another Bank) do not cause the stock of the member to 
become excess stock. Accordingly, such a merger, in and of itself, 
cannot cause the disappearing member's Bank stock to become excess 
stock. As a practical matter, however, some or all of the Bank stock 
owned by a member that has merged into a nonmember of that Bank could 
become excess stock as a result of the Bank's next calculation of each 
member's minimum stock purchase requirement. In the normal course, each 
Bank likely will adjust periodically the amount of Bank stock that each 
member is required to own as a condition of membership; under the 
current capital structure, such calculations are done at least 
annually. If a member were to merge out of existence during the course 
of the year, its membership will have terminated. As of the next annual 
calculation of that institution's minimum stock purchase requirement, 
the amount of stock required as a condition of membership may well be 
zero (depending on the terms of that Bank's capital structure plan) and 
the amount of the activity-based stock purchase requirement will depend 
on what portion of the prior member's business activities were assumed 
by the surviving institution. If the annual recalculation were to 
reduce the membership component of the stock purchase requirement to 
zero, all Bank stock formerly held as a condition of membership would 
at that time become excess stock, and thus would be eligible for 
repurchase at the discretion of the Bank. Because a Bank can only 
calculate membership requirements under the conditions set forth in its 
capital plan, a Bank wishing to provide itself with the flexibility to 
recalculate membership requirements more frequently than annually, such 
as upon the completion of a merger, would have to include in its 
capital plan a provision allowing for more frequent calculation of the 
membership stock purchase requirements.
    Rolling redemption. One Bank expressed concern that Sec. 931.7(a) 
could permit a member to file a redemption notice against all of its 
stock, even while such stock is needed to support membership or 
activity requirements, allowing what the commenter described as a 
rolling redemption. See 12 CFR 931.7(a). In addressing this concern, 
the Bank proposed amending Sec. 931.7 in one of three ways: (1) To deem 
a request to redeem all required membership stock as equivalent to a 
notice of withdrawal from membership; (2) to permit a Bank to require 
that the member cancel any redemption notice with respect to the amount 
of stock that would be needed to support a new advance, if the member 
had requested to redeem all of its activity-based stock but then seeks 
to obtain new advances or other activities that would mature beyond the 
final redemption date; or (3) to permit a Bank to require that all 
advances or other obligations always be supported by activity-based 
stock that will not become ``fully redeemable'' until after the 
maturity date of the advance. The Finance Board, however, believes the 
language in Sec. 931.7(a) is appropriate and does not require any of 
the changes suggested by the Bank.
    The Finance Board does not believe that a Bank should be able to 
deem a notice of redemption to be a notice of withdrawal, even if the 
member is requesting redemption of all of its required membership 
stock. Section 6(d) of the Bank Act sets forth the conditions for a 
member's withdrawal from a Bank or for the involuntary termination of 
its membership. 12 U.S.C. 1426(d). It would appear inconsistent with 
the statutory provision requiring a member to file a notice to withdraw 
before it may voluntarily terminate its membership in a Bank to allow 
the Bank to deem a redemption notice to be the equivalent of a 
withdrawal notice in the absence of some affirmative member action to 
signify its intent to withdraw.
    Further, because the Bank cannot actually redeem any required 
membership or activity-based stock until the member's withdrawal is 
effective or the activity in question is no longer on the Bank's 
balance sheet, the Finance Board does not think that members have as 
great an incentive to engage in rolling redemptions as the commenter 
may fear, especially if the Bank intends to actively manage its excess 
stock position. Additionally, Sec. 931.7(a) permits a Bank to impose a 
fee, to be specified in its capital plan, on a member that cancels a 
pending notice of redemption, which could be used to further reduce the 
incentive to engage in rolling redemptions. Thus, the Finance Board is 
not proposing any changes to its rules in response to the comments on 
this issue.
    Accounting issue with regard to the calculation of total capital. 
One Bank urged the Finance Board to consider following guidance issued 
by the Federal Financial Institutions Examinations Council (FFIEC) in 
early 1999 requiring financial institutions to exclude from the 
calculation of regulatory capital any changes in the fair value of 
derivatives used for certain risk management purposes that are recorded 
in Other Comprehensive Income and Loss (OCI) on the balance sheet. See 
OCC Bulletin 99-1, FAS 133 Accounting for Derivatives (Jan. 4, 1999). 
The commenter believed that to ensure consistency within the Bank 
System as well as with other financial institutions in regulatory 
capital calculations, the Finance Board should adopt a similar rule for 
the Banks. OCI, however, is not included in the calculation of 
permanent and total capital, as those terms are defined in the Bank Act 
and the Finance Board regulations, so that changes in the value of OCI 
have no effect on the value of the Banks' regulatory capital. See 12 
U.S.C. 1426(a)(5) and 12 CFR 930.1. Thus, no change is needed to the 
capital rule to address this comment. The Finance Board, however, does 
wish to clarify the meaning of the definitions of total and permanent 
capital, to avoid the possibility of confusion about these terms.
    Permanent capital, as defined in the statute and the Finance Board 
regulations, equals retained earnings determined in accordance with 
GAAP plus the amounts paid in for Class B stock. Total capital, as 
defined in the statute and the Finance Board regulations, equals 
permanent capital plus amounts paid in for Class A stock plus, 
consistent with GAAP, any general allowance for losses plus the amount 
of any other appropriate instruments that the Finance Board has 
determined to be available to absorb losses. Thus by

[[Page 41472]]

definition, OCI is not an element of total and permanent capital as 
defined by statute and regulation, and therefore should not be included 
in the calculation of total or permanent capital.
    The Finance Board emphasizes, however, that the regulatory 
definition for total and permanent capital differs in its meaning and 
calculation from the item ``total capital'' (which is also known as 
GAAP capital or GAAP total capital), which appears on the Statements of 
Condition for the Bank System and the individual Banks as published in 
their Annual and Quarterly Reports. The commenter appears to have 
interpreted total capital, as defined in the statute and the Finance 
Board's regulations, to be the same as the balance sheet GAAP total 
capital, which is not the case.
    Operations risk. One Bank urged the Finance Board to reconsider the 
operations risk capital charge in light of the approach proposed by the 
Basel Committee on Banking Supervision (Basel Committee) in the 
recently released consultative document on the New Basel Capital 
Accord. See 12 CFR 932.6. The commenter contended that the Basel 
Committee had set its operations charge at 20 percent of an 
institution's credit and market risk, and therefore, that the Finance 
Board should consider reducing its basic operations risk charge. 
Contrary to the Bank's understanding, however, in developing its 
proposed framework for an operations risk capital charge, the Basel 
Committee assumed that operations risk accounts for 20 percent of 
current minimum total regulatory capital and calibrated the 
calculations of proposed operations risk capital charges 
accordingly.\6\ See Basel Committee, Operational Risk, Supporting 
Document to the New Basel Capital Accord, 5 (Jan. 2001). By comparison, 
under Sec. 932.6, the basic operations risk capital charge--equal to 30 
percent of a Bank's credit and market risk capital charges--would 
account for about 23 percent of the total minimum risk-based capital 
requirement. Moreover, because of potential differences in the 
operations of the Banks and the institutions reviewed by the Basel 
Committee \7\ and the fact that the Banks' regulatory capital is not 
now, nor will it be under the Finance Board's capital regulations, 
calculated under the current Basel Accord, the Basel Committee's 
conclusions are not directly applicable to the Banks.
---------------------------------------------------------------------------

    \6\ The framework proposed by the Basel Committee contemplates 
``three methods for calculating operational risk capital charges in 
a continuum of increasing sophistication and risk sensitivity.'' 
Basel Committee, Operational Risk, Supporting Document to the New 
Basel Capital Accord,  4 (January 2001). The simplest approach, the 
Basic Indicator Approach, would establish an operation risk capital 
charge based on a set percentage of a proxy variable for an entity's 
operations risk exposure. Under the more sophisticated Standardized 
Approach, operations risk charges would be calculated for each 
business line operated by a bank based on a proxy variable 
particular to that business line and a loss factor. A bank's primary 
regulator would establish the standardized business lines, proxy 
variables and loss factors to be used. The more complex Internal 
Measurement Approach would allow a bank the flexibility to calculate 
the expected loss from operations risk for each of its business 
lines. Regulators would provide a standardized factor for each 
business line that would transform the expected loss into a capital 
charge. Initially, banks moving to the Internal Measurement Approach 
would be subject to a minimum operations risk capital charge. To 
apply the more sophisticated methods of calculating the operations 
risk charge, a bank would have to demonstrate increased 
sophistication in the measurement and control of operations risk.
    \7\ The Basel Committee's assumption concerning operations risk 
is based on a small sampling of financial institutions which have 
regulatory capital calculated under the current Basel Capital 
Accord. Id.
---------------------------------------------------------------------------

    More importantly, the Basel Committee recently reported that ``the 
target proportion of regulatory capital related to operational risk 
(i.e., 20%) will be reduced in line with the view that this reflects 
too large an allocation * * * to this risk as the Basel Committee has 
defined it.'' Basel Committee Press Release, ``Update on New Basel 
Capital Accord'' (June 25, 2001) (available at www.bis.org/press). It 
also stated that it was considering other comments and suggestions 
related to operations risk. Id. It is not yet clear what proportion of 
regulatory capital that the Basel Committee will allocate to operations 
risk or what other changes it may make to its operations risk proposal.
    Thus, given the difficulties in directly applying the Basel 
approach to the Banks and current uncertainties surrounding the Basel 
Committee's operations risk proposal, the Finance Board continues to 
believe that the statutory charge imposed on the other housing GSEs, 
the Federal National Mortgage Association (FannieMae) and the Federal 
Home Loan Mortgage Corporation (Freddie Mac), remains the best basis 
for assessing an operations risk capital charge for the Banks. See 12 
U.S.C. 4611(c)(2). Further, the Finance Board's operations risk 
provision provides the Banks with the flexibility to demonstrate that a 
lower charge should be applied to them, subject to a minimum operations 
risk charge equal to ten percent of the sum of the credit and market 
risk charges. See 12 CFR 932.6(b) and 66 FR at 8299-8300 (discussing 
operations risk charge). This flexibility allows the Banks to use 
recent theoretical and regulatory advances concerning operations risk 
to develop their own rigorous and comprehensive analysis to support a 
request for a lower operations risk charge. Id.
    Use of excess stock to meet capital requirements. Four Banks 
submitted comments expressing concern about the meaning of the language 
in section 933.2(a)(4) of the Finance Board's rules that the minimum 
investment requirement established by the capital plans ``shall be set 
at a level that, * * * provides sufficient capital for the Bank to 
comply with its minimum capital requirements * * *.'' 12 CFR 
933.2(a)(4). They questioned whether this language prevented excess 
stock from being counted toward meeting a Bank's total and risk-based 
capital requirements.
    This language generally requires a Bank to set its minimum 
investment requirement at levels that provide enough capital for it to 
meet its regulatory capital requirements and that provide a sound and 
stable capitalization base after considering conditions at the Bank. 
The provision does not mean that excess stock may not be counted toward 
meeting the regulatory capital requirements. The statute provides no 
basis for making distinction between excess and required capital stock 
in calculating levels of permanent and total capital. Thus, the paid-in 
value of all capital stock, regardless of whether the capital stock is 
considered in excess of a member's minimum stock purchase requirement, 
counts as total capital, while the paid-in value of all Class B stock 
outstanding is counted as permanent capital.
    The Finance Board believes that the language in section 933.2(a)(4) 
is accurate and does not require any change. The Finance Board, 
however, would like to reiterate that while excess capital is included 
in calculations for purposes of meeting regulatory capital 
requirements, placing undue reliance on excess stock to fulfill these 
capital requirements in a proposed capital plan may be viewed as 
inconsistent with the concept of ``excess stock'', and the capital 
structure proposed in that capital plan may be viewed as deficient by 
the Finance Board, requiring additional action by the Bank to address 
the capital structure's shortcomings.

IV. Regulatory Flexibility Act

    The final rule would apply 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

[[Page 41473]]

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.

V. Paperwork Reduction Act

    The proposed rule does not contain any collections of information 
pursuant to the Paperwork Reduction Act of 1995. See 44 U.S.C. 3501 et 
seq. Therefore, the Finance Board has not submitted any information to 
the Office of Management and Budget for review.

List of Subjects

12 CFR Part 925

    Credit, Federal home loan banks, Reporting and recordkeeping 
requirements.

12 CFR Parts 930, 931, 932, and 933

    Capital, Credit, Federal home loan banks, Investments, Reporting 
and recordkeeping requirements.

    Accordingly, the Federal Housing Finance Board proposes to amend 
title 12, chapter IX of the Code of Federal Regulations as follows:

PART 925--MEMBERS OF THE BANKS

    1. The authority citation for part 925 continues to read as 
follows:

    Authority: 12 U.S.C. 1422, 1422a, 1422b, 1423, 1424, 1426, 1430, 
1442.

    2. Amend Sec. 925.26 by revising paragraph (b) to read as follows:


Sec. 925.26  Voluntary withdrawal from membership.

* * * * *
    (b) Effective date of withdrawal. The membership of an institution 
that has submitted a notice of withdrawal shall terminate as of the 
date on which the last of the applicable stock redemption periods ends 
for the stock that the member is required to hold under the terms of a 
Bank's capital plan as a condition of membership, unless the 
institution has cancelled its notice of withdrawal prior to that date.
* * * * *
    3. Amend Sec. 925.27 by revising paragraph (c) to read as follows:


Sec. 925.27  Involuntary termination of membership.

* * * * *
    (c) Membership rights. An institution whose membership is 
terminated involuntarily under this section shall cease being a member 
as of the date on which the board of directors of the Bank acts to 
terminate the membership, and the institution shall have no right to 
obtain any of the benefits of membership after that date, but shall be 
entitled to receive any dividends declared on its stock until the stock 
is redeemed or repurchased by the Bank.

PART 930--DEFINITIONS APPLYING TO RISK MANAGEMENT AND CAPITAL 
REGULATIONS

    4. The authority citation for part 930 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1440, 1443, 
1446.

    5. In Sec. 930.1 add, in correct alphabetical order the definitions 
for Certain drawdown and Charges against the capital of the Bank, to 
read as follows:


Sec. 930.1  Definitions.

* * * * *
    Certain drawdown means a legally binding agreement that commits the 
Bank to make an advance or acquire a loan, at or by a specified future 
date.
    Charges against the capital of the Bank means an other than 
temporary decline in the Bank's total equity that causes the value of 
total equity to fall below the Bank's aggregate capital stock amount.
* * * * *

PART 931--FEDERAL HOME LOAN BANK CAPITAL STOCK

    6. The authority citation for part 931 continues to read:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1440, 1443, 
1446.

    7. Amend Sec. 931.4 by revising the first sentence of Sec. 931.4(a) 
to read as follows:


Sec. 931.4  Dividends.

    (a) A Bank may pay dividends on Class A or Class B stock, including 
any subclasses of such stock, only out of previously retained earnings 
or current net earnings, and shall declare and pay dividends only as 
provided by its capital plan. * * *
* * * * *
    8. Amend Sec. 931.6 by revising the first sentence of the section 
and adding a new sentence at the end of the section to read as follows:


Sec. 931.6  Transfer of capital stock.

    A Bank in its capital plan may allow a member to transfer any 
excess capital stock of the Bank to another member of that Bank or to 
an institution that has been approved for membership in that Bank and 
that has satisfied all conditions for becoming a member, other than the 
purchase of the minimum amount of Bank stock that it is required to 
hold as a condition of membership. * * * The Bank may, in its capital 
plan, require a member to receive the approval of the Bank before a 
transfer of the Bank's stock, as allowed under this section, is 
completed.

PART 932--FEDERAL HOME LOAN BANK CAPITAL REQUIREMENTS

    9. The authority citation for part 932 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1440, 1443, 
1446.

    10. Amend Sec. 932.4 by revising paragraph (d) heading, revising 
the first sentence in paragraph (e)(2)(ii)(E) and revising Table 2 
which follows paragraph (f)(1), to read as follows:


Sec. 932.4  Credit risk capital requirement.

* * * * *
    (d) Credit risk capital charge for derivative contracts.
* * * * *
    (e) * * *
    (2) * * *
    (ii) * * *
    (E) The credit risk percentage requirement for mortgage assets that 
are acquired member assets described in Sec. 955.2(a) of this chapter 
shall be assigned from Table 1.2 of this part based on the rating of 
those assets after taking into account any credit enhancement required 
by Sec. 955.3 of this chapter. * * *
* * * * *
    (f) * * *
    (1) * * *

     Table 2.--Credit Conversion Factors For Off-Balance Sheet Items
------------------------------------------------------------------------
                                                                Credit
                                                              conversion
                         Instrument                          factor  (in
                                                               percent)
------------------------------------------------------------------------
Asset sales with recourse where the credit risk remains              100
 with the Bank.............................................
Commitments to make advances subject to certain drawdown
Commitments to acquire loans subject to certain drawdown...
Standby letters of credit..................................           50
Other commitments with original maturity of over one year
Other commitments with original maturity of one year or               20
 less......................................................
------------------------------------------------------------------------

* * * * *

PART 933--BANK CAPITAL STRUCTURE PLANS

    11. The authority citation for part 933 continues to read:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1440, 1443, 
1446.


[[Page 41474]]


    12. Amend Sec. 933.2 by redesignating paragraphs (e)(4), (e)(5) and 
(e)(6) as paragraphs (e)(5), (e)(6) and (e)(7), respectively and by 
revising paragraph (e)(3) and adding new paragraph (e)(4) to read as 
follows:


Sec. 933.2  Contents of plan.

* * * * *
    (e) * * *
    (3) Shall specify whether the stock of the Bank may be transferred 
among members, and, if such transfer is allowed, shall specify the 
procedures that a member should follow to effect such transfer, and 
that the transfer shall be undertaken only in accordance with 
Sec. 931.6 of this chapter;
    (4) Shall specify that the stock of the Bank may be traded only 
between the Bank and its members;
* * * * *
    13. Add new Sec. 933.5 to read as follows:


Sec. 933.5  Disclosure to members concerning capital plan and capital 
stock conversion.

    (a) No capital plan shall become effective until disclosure meeting 
the requirements of Item 11(a) through (d) and Item 12(a) through (e) 
of Schedule 14A of the Securities and Exchange Commission's (SEC's) 
rules (17 CFR 240.14a-101, Items 11 and 12) (Proxy Statement 
Disclosure) and of paragraph (b) of this section has been provided to 
members. All disclosure required under this section shall be 
transmitted, sent or given to members at least twenty days prior to the 
effective date of a Bank's capital plan.
    (b) In addition to Proxy Statement Disclosure, the following 
information shall be provided to members:
    (1) The Bank shall disclose financial information as follows:
    (i) Audited balance sheets as of the end of the two most recent 
fiscal years, statements of income and cash flows for each of the three 
fiscal years preceding the date of the most recent audited balance 
sheet being presented, and interim balance sheets and statements of 
income and cash flows as of and for appropriate interim dates that are 
in scope, form and content consistent with the requirements of the 
SEC's Regulations S-X and S-K (17 CFR parts 210 and 229);
    (ii) Quarterly pro forma balance sheets and income statements 
covering two years from the ``as of'' date (next-to-latest quarter or 
latest quarter-end prior to submission of the capital plan) or, at a 
minimum, six quarters from the expected date of conversion to the new 
capital stock, whichever time period is greater, in detail sufficient 
to illustrate changes in the Bank's capital structure, dividends, 
product volumes, investment volumes, and new business lines, and risk 
profile;
    (iii) Pro forma risk-based capital requirement for the ``as of'' 
date and for the quarterly periods reflected pursuant to 
Sec. 933.5(b)(1)(ii), if not already included in the pro forma balance 
sheet;
    (iv) Disclosure of the assumptions underlying the pro forma 
financial information required by paragraphs (b)(1)(ii) and (b)(1)(iii) 
of this section, and the basis for these assumptions; and
    (v) Any of the financial information required by Sec. 933.5(b)(1) 
may be incorporated by reference, provided the information being 
incorporated is contained in an annual or quarterly Bank or Bank System 
report, or in information filed with the Finance Board along with the 
Bank's capital plan, and the disclosure identifies the information 
being incorporated by reference.
    (2) Any amendments anticipated to be made to the Bank's by-laws, 
policies or other governance documents as a result of the 
implementation of the capital plan should be fully described.
    (3) The Bank should state the name, address and telephone number 
where members may direct written or oral requests for a copy of the 
capital plan and any other instrument or document that defines the 
rights of the member/stockholders. This information shall be provided 
to the members without charge to them.
    (4) The Bank shall provide a brief statement as to the anticipated 
accounting treatment and the federal income tax consequences of the 
transaction.
    (c) Nothing in this section shall create or be deemed to create any 
rights in any third party.

    Dated: August 1, 2001.

    By the Board of Directors of the Federal Housing Finance Board.
J. Timothy O'Neill,
Chairman.
[FR Doc. 01-19852 Filed 8-7-01; 8:45 am]
BILLING CODE 6725-01-P