[Federal Register Volume 71, Number 249 (Thursday, December 28, 2006)]
[Rules and Regulations]
[Pages 78046-78051]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-22325]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 900, 917, 925, and 930

[No. 2006-23]
RIN 3069-AB30


Limitation on Issuance of Excess Stock

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is adopting 
a final rule limiting the ability of a Federal Home Loan Bank (Bank) to 
create member excess stock under certain circumstances. Under the rule, 
any Bank with excess stock greater than 1 percent of its total assets 
will be barred from further increasing member excess stock by paying 
dividends in the form of shares of stock (stock dividends) or otherwise 
issuing new excess stock. The final rule is based on a proposed rule 
that sought to impose a limit on excess stock and establish a minimum 
retained earnings requirement. The final rule deals only with the 
excess stock provisions of the proposal. The Finance Board intends to 
address retained earnings in a later rulemaking.

EFFECTIVE DATES: This rule will become effective on January 29, 2007.

FOR FURTHER INFORMATION CONTACT: Daniel E. Coates, Associate Director, 
Office of Supervision, [email protected] or 202-408-2959; or Thomas E. 
Joseph, Senior Attorney-Advisor, Office of General Counsel, 
[email protected] or 202-408-2512. You can send regular mail to the 
Federal Housing Finance Board, 1625 Eye Street, NW., Washington DC 
20006.

SUPPLEMENTARY INFORMATION:

[[Page 78047]]

I. Statutory and Regulatory Background

    The Federal Home Loan Bank System (Bank System) consists of 12 
Banks and the Office of Finance (OF). The Banks are instrumentalities 
of the United States organized under the authority of the Federal Home 
Loan Bank Act (Bank Act). 12 U.S.C. 1421 et seq. Although the Banks are 
federally chartered institutions, they are privately owned and were 
created by Congress to support the financing of housing and community 
lending by their members (which are principally depository 
institutions) and, as such, are commonly categorized as ``government 
sponsored enterprises'' (GSEs). See 12 U.S.C. 1422a(a)(3)(B)(ii), 1424, 
1430(i), and 1430(j). As GSEs, the Banks are able to borrow in the 
capital markets at favorable rates. They pass along this funding 
advantage to their members--and ultimately to consumers--by providing 
secured loans, known as advances, and other financial services to 
members at rates that members generally could not obtain elsewhere.
    Prior to the passage of the Gramm-Leach-Bliley Act \1\ (GLB Act) in 
November 1999, all Banks issued a single class of stock with a par 
value set at $100. Generally, all transactions in this stock were 
required to occur at the par value. See 12 U.S.C. 1426(a) and (b)(3) 
(1994); 12 CFR 925.19 and 925.22(b)(2). By statute, Bank members were 
required to purchase and retain a minimum amount of stock equal to the 
greater of: (i) $500; (ii) 1 percent of the member's aggregate unpaid 
principal balance of home mortgage or similar loans; or (iii) 5 percent 
of a member's outstanding advances. See 12 U.S.C. 1426(b) (1994). 
Further, the Bank Act did not impose specific minimum capital 
requirements on the Banks individually, although the Finance Board did 
establish such requirements by regulation. See 12 CFR 966.3(a).
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    \1\ Pub. L. 106-102, 133 Stat. 1338 (Nov. 12, 1999).
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    The GLB Act amended the Bank Act to create a new capital structure 
for the Bank System and to impose statutory minimum capital 
requirements on the individual Banks. As part of this change, each Bank 
must adopt and implement a capital plan consistent with provisions of 
the GLB Act and Finance Board regulations. Among other things, each 
capital plan establishes stock purchase requirements that set the 
minimum amount of capital stock a Bank's members must purchase as a 
condition of membership and of doing business with the Bank. See 12 
U.S.C. 1426(c)(1); 12 CFR 933.2(a). To date, all of the Banks but the 
Chicago Bank have implemented their GLB Act capital plans.
    The Banks and OF operate under the supervision of the Finance 
Board. The Finance Board's primary duty is to ensure that the Banks 
operate in a financially safe and sound manner. See 12 U.S.C. 
1422a(a)(3)(A). To the extent consistent with this primary duty, the 
Bank Act also requires the Finance Board to supervise the Banks and 
ensure that they carry out their housing finance mission, remain 
adequately capitalized, and are able to raise funds in the capital 
markets. See 12 U.S.C. 1422a(a)(3)(B). To carry out its duties, the 
Finance Board is empowered, among other things, ``to promulgate and 
enforce such regulations and orders as are necessary from time to time 
to carry out the provisions of [the Bank Act].'' 12 U.S.C. 1422b(a)(1).

II. Proposed Rulemaking

    On March 6, 2006, the Board of Directors of the Finance Board 
approved a proposed rule that was intended to address supervisory 
concerns relating to the amount of outstanding member excess stock and 
retained earnings, respectively, at the Banks.\2\ These proposed 
amendments were published for comment in the Federal Register on March 
15, 2006. See Proposed Rule: Excess Stock Restrictions and Retained 
Earnings Requirements for the Federal Home Loan Banks, 71 FR 13306 
(Mar. 15, 2006) (Proposed Rule). The 120-day comment period closed on 
July 13, 2006. The Finance Board received 1,066 comment letters, nearly 
all of which opposed some aspect of the proposed rule.
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    \2\ Excess stock is any Bank stock held by a member that exceeds 
that member's minimum investment in capital stock required by the 
Bank Act, Finance Board regulations, or the Bank's capital plan.
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    Retained Earnings Requirements. In response to long-standing 
Finance Board concerns, the proposed rule would have required each Bank 
to achieve and maintain a minimum level of retained earnings equal to 
$50 million plus 1 percent of the Bank's non-advance assets. The 
proposal also would have barred Banks not meeting that requirement from 
distributing more than 50 percent of net income as dividends except 
with the approval of the Finance Board. The Finance Board continues to 
believe that retained earnings are a critical component of Bank 
capital. However, it also sees merit in the suggestions of some 
commenters that the retained earnings requirement could be refined to 
correlate more closely to the risk profile of each Bank and that 
restrictions on dividend payments could be set so as not to unduly 
disrupt the value of Bank membership. Accordingly, and in view of the 
Finance Board's previously announced initiative to modernize and 
overhaul its risk-based capital regulation to reflect advances in 
identifying and managing risks that have occurred since the capital 
regulations were first adopted,\3\ the Finance Board has decided not to 
address the minimum amount of retained earnings as part of this 
rulemaking.
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    \3\ At the Finance Board meeting during which the proposed 
excess stock and retained earnings requirements were approved for 
publication, Finance Board staff indicated that it planned to 
explore and develop a more robust approach to setting risk-based 
capital requirements for the Banks. See Transcript of March 8, 2006 
Meeting (Open Session) at p. 17. Transcripts of open sessions of 
Finance Board meetings are available at the Finance Board's Web 
site: http://www.fhfb.gov/Default.aspx?Page=40.
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    Excess Stock Limitation. The proposed rule would have limited the 
amount of member excess stock that a Bank could have outstanding to 1 
percent of its total assets. A Bank with member excess stock above that 
limit as of the end of any calendar quarter would have been required to 
report the violation to the Finance Board. Any such Bank also would 
have been required either to cure the violation or to submit a plan to 
the Finance Board to bring its level of member excess stock into 
compliance with the limit. The proposal also would have prohibited a 
Bank from paying stock dividends and from issuing excess stock to 
members regardless of how much excess stock it had outstanding.
    In explaining its reasons for the proposed rule, the Finance Board 
noted that it had intended to address both mission and safety and 
soundness concerns. With regard to the mission concerns, the Finance 
Board stated that the Banks often have used member excess stock to 
support capital market investments that typically generate greater 
earnings than the costs of the Banks' debt. Although some level of such 
investments is appropriate for liquidity and other purposes, high 
levels of excess stock can create an incentive for the Banks to create 
large portfolios of arbitrage investments that are meant to provide a 
return on the excess stock, but which do not necessarily further the 
Bank System's public purpose. Such arbitrage activities generally 
result in the Banks being larger and holding more debt than otherwise 
would be the case.
    With regard to the safety and soundness concerns, the Finance Board 
explained that the historical practice of most Banks to honor a 
member's request to repurchase excess stock creates

[[Page 78048]]

certain expectations among the members, which could lead to capital 
instability, particularly if a Bank were to experience large-scale 
repurchase requests in a short period of time. Proposed Rule, 71 FR at 
13308-13309. These problems could be compounded if a Bank used the 
excess stock to capitalize investments that are intermediate- and long-
term in nature, some of which may have significant market risk and may 
not be readily saleable without realizing a substantial loss in market 
value, such as mortgage-backed securities, federal agency securities, 
or acquired member assets (AMA). See Proposed Rule, 71 FR at 13308-
13309. Such a strategy would make it difficult for a Bank to shrink its 
balance sheet to meet the repurchase requests. The Finance Board noted 
that a failure to meet member expectations could adversely affect the 
members' confidence in the Bank System and how banking regulators treat 
Bank stock for risk-based capital purposes. Proposed Rule, 71 FR at 
13309. Any loss of confidence could prompt members to redeem their 
excess stock, withdraw from membership, or cease doing business with a 
Bank, all of which could undermine a Bank's financial stability. To 
avoid a loss of confidence, a Bank could feel pressure to continue to 
repurchase stock, even if that was not in the best long-term interest 
of the Bank's capitalization or profitability.\4\
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    \4\ Regulators of other GSEs whose stock generally is 
repurchased have recognized the incentive for a GSE to try to avoid 
suspending repurchases of stock. For example, in proposing rules 
addressing capital and other issues for the Farm Credit System, the 
Farm Credit Administration noted that:
    For an association to use this authority [to refrain from 
repurchasing stock] in a way that makes borrower stock a meaningful 
buffer [against losses], the association has to recognize potential 
losses in a timely manner and be willing to withhold proceeds from 
stock retirement requests. However, such actions can signal problems 
to existing and potential borrowers at the association. Thus, an 
association might continue to make retirements until the evidence of 
serious adverse financial conditions is abundantly clear.
    Proposed Rule: Funding and Fiscal Affairs, Loan Policies, and 
Operations and Funding Operations; General Provisions; Disclosure to 
Shareholders; Capital Adequacy, 60 FR 38521, 38522 (July 27, 1995).
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    General Overview of Comments. The Finance Board received 1,066 
comment letters on its proposal, all but 2 of which opposed adoption of 
the proposed rule, either in whole or in part. The Finance Board 
received comments from all 12 Banks, many banking or financial trade 
groups, organizations involved in affordable housing, Bank members, 
individuals, and other interested parties. Of the 1,066 comment 
letters, 454 addressed the excess stock limit, the prohibition on stock 
dividends, or both. Of those 454 letters, 409 opposed the 1 percent 
limit on excess stock, 403 opposed the prohibition against paying stock 
dividends, and 358 opposed both. In addition, 6 letters addressed the 
prohibition on the sale of stock that is excess at the time of sale. 
Four of those letters also addressed the excess stock limit or the 
prohibition on stock dividends. Of the 454 letters addressing the 
excess stock limit, the prohibition on stock dividends, or both, 343 
were submitted by persons located within states that constitute the 
geographic district of the Cincinnati Bank.
    The substance of the issues raised by the comment letters is 
discussed in some detail below, as part of the discussion of the 
provisions of the final rule.\5\ Generally speaking, significant 
numbers of commenters urged the Finance Board to withdraw the proposed 
rule, contending that it would adversely affect the value of 
membership, was contrary to the statute, would reduce the total capital 
of the Banks, would lower liquidity and earnings, and would reduce 
contributions to the Affordable Housing Program (AHP).\6\
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    \5\ A large number of the comments specifically addressed the 
proposed retained earnings requirements. Because the Finance Board 
has decided to adopt only the excess stock provisions at this time, 
it is not addressing comments that specifically relate to the 
retained earnings provisions of the proposed rule.
    \6\ Each Bank has to contribute 10 percent of its net income to 
the AHP or such prorated sums as may be required to assure that the 
aggregate contributions of all Banks equal no less than $100 million 
in any given year. See 12 U.S.C. 1430(j)(5).
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    Notwithstanding the various contentions raised by the comment 
letters, the Finance Board remains concerned that high levels of member 
excess stock can pose a risk to the Banks and provide an incentive for 
the Banks to engage in arbitrage investments at a level that is 
inconsistent with their statutory mission. For those reasons, the 
Finance Board has determined that it should adopt a final rule 
regarding excess stock, albeit with a number of changes to address 
criticisms made in the comment letters.

III. Final Rule

    The key features of the proposed rule were a fixed limit on the 
amount of member excess stock that any Bank could have outstanding, 
along with an absolute ban on the payment of stock dividends and sales 
of additional excess stock. The key feature of the final rule is that 
it limits the ability of a Bank to issue new shares of excess stock 
once the amount of its outstanding excess stock reaches a certain 
threshold. Specifically, the final rule provides that any Bank with 
outstanding excess stock greater than 1 percent of its total assets may 
not pay dividends in the form of stock or otherwise issue shares of 
excess stock. Banks with excess stock below that threshold will not be 
limited in their ability to pay stock dividends or otherwise issue 
shares of excess stock. The rule also clarifies that a Bank may not 
issue excess stock as a stock dividend or otherwise if after the 
issuance of such stock, the Bank's outstanding excess stock would be 
above 1 percent of its total assets. In light of those changes, the 
final rule eliminates the proposed provisions that would have required 
non-complying Banks to report any violations of the limit and to cure 
the violation or develop a compliance plan within 60 days.
    The final rule will consolidate the excess stock restrictions into 
Sec.  925.23 of the Finance Board regulations rather than adopting a 
newly created part as had been proposed.\7\ The final rule also adopts 
the definition of ``excess stock'' (with a modest clarifying change) 
set forth in the proposed rule and moves this definition from Sec.  
930.1 to Sec.  900.2 of the Finance Board rules. As explained in the 
preamble to the proposed rule, these changes were meant to be 
clarifying in nature and to assure that the definition of excess stock 
applied both to the 11 Banks that have implemented their capital plans 
and the 1 Bank that has not done so. See Proposed Rule, 71 FR at 13310. 
Finally, the Finance Board is adopting the proposed provision requiring 
dividends to be calculated based on actual, rather than projected, 
earnings.
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    \7\ 12 CFR 925.23. Prior to the changes adopted in this 
rulemaking, Sec.  925.23 addressed the rights of members to purchase 
excess stock. The Finance Board had proposed to incorporate the 
excess stock limitation along with the retained earnings 
requirements into a new part 934 of its regulations. See Proposed 
Rule, 71 FR at 13315.
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IV. Discussion

    A significant number of the commenters opposed the creation of any 
limit on excess stock, as well as the Finance Board's decision to set 
the limit at 1 percent of each Bank's assets. The commenters questioned 
the need for such a rule, as well as the authority of the Finance Board 
to adopt the rule, and contended, among other things, that the proposed 
rule represented a major change in Finance Board policy, was 
inconsistent with the capital provisions of the GLB Act and the 
approved capital plans, and would have untoward consequences for the 
Banks and their members.

[[Page 78049]]

    Need for the rule. Notwithstanding the contentions of many of the 
comment letters, the Finance Board believes that high levels of excess 
stock could pose correspondingly greater risks to the Banks and that 
the final rule is needed to address those risks. There have been 
instances in which certain of the Banks have used excess stock to 
capitalize significant arbitrage investments or portfolios of 
intermediate- or long-term investments in federal agency securities or 
mortgages, both of which have exposed the Banks to greater market risk. 
For example, one Bank relied on excess stock to capitalize significant 
investments in federal agency securities that generated an initial 
favorable spread only because the Bank took on considerable interest-
rate risk in funding the investments. Other Banks have used excess 
stock to capitalize investments in intermediate- and long-term 
investments, including AMA, which may well remain outstanding beyond 
the redemption periods associated with the excess stock. Such 
investments capitalized with excess stock pose additional risks 
relative to AMA investments capitalized by required stock, i.e., stock 
held pursuant to an activity-based stock purchase requirement, because 
the excess stock has proven to be a less stable source of capital. In 
certain cases, members owning excess stock have sought to have that 
stock redeemed or repurchased when the returns generated by the 
arbitrage investments and AMA caused the Bank's dividend yield to 
decrease.
    Although the Finance Board believes that high levels of excess 
stock must be addressed, it is receptive to the suggestions of some 
commenters that the regulatory solution should be more narrowly focused 
on the principal risks, i.e., those Banks with the greatest levels of 
excess stock. For that reason, the Finance Board has determined that an 
appropriate approach is to restrict the Banks with the highest levels 
of excess stock from increasing the amount of their outstanding excess 
stock through the issuance of stock dividends or the sale of excess 
stock. The Finance Board believes that the 1 percent of assets level, 
which originally was proposed as a cap on the amount of excess stock 
that may be outstanding, is an appropriate level to trigger the 
restrictions imposed by the final rule. Thus, Banks with excess stock 
greater than 1 percent of total assets will be prohibited from paying 
stock dividends and otherwise issuing excess stock to their members. 
Banks with excess stock less than or equal to 1 percent of total assets 
will be able to do so, provided such action does not result in the 
Bank's total excess stock exceeding 1 percent of its assets.
    As was discussed in the proposed rule, excess stock of up to 1 
percent of assets should allow any Bank sufficient latitude to support 
both its mortgage-backed securities portfolio (up to 300 percent of its 
capital) plus a sufficient portfolio of assets for liquidity purposes. 
In recent years, for example, the Banks' investments in mortgage-backed 
securities have averaged between 11 and 13 percent of assets and their 
liquidity investments have averaged between 8 and 12 percent of assets. 
See Proposed Rule, 71 FR at 13309. Moreover, the fact that 8 Banks have 
been able to maintain adequate liquidity, serve their mission goals, 
and provide members with adequate services while keeping excess stock 
at levels below 1 percent of total assets indicates that the final rule 
should not pose an unreasonable burden on any Bank. With respect to 
those Banks with levels of excess stock below 1 percent of assets, the 
Finance Board intends to monitor the extent of their reliance on excess 
stock as part of its normal supervisory processes and will take 
appropriate supervisory action if the levels of or trends in excess 
stock pose potential safety and soundness problems for those Banks.
    Legal authority. A number of the comment letters questioned the 
authority of the Finance Board to adopt a regulation limiting the 
amount of excess stock or prohibiting the payment of stock dividends. 
Those commenters generally contended that various provisions of the 
Bank Act left those matters to the individual Banks to address. The 
most straightforward response to that contention is that the Congress 
has not addressed the issue of excess stock, either in the GLB Act or 
in any other provisions of the Bank Act. Moreover, the Finance Board 
believes that the Bank Act provides ample authority for it to adopt a 
rule limiting excess stock, and further notes that the changes made in 
the final rule may well render moot certain of the arguments raised 
with respect to the legal authority for the proposed rule.
    Congress has provided that the primary duty of the Finance Board is 
to ensure that the Banks operate in a financially safe and sound manner 
and, secondarily, to supervise the Banks and, among other things, to 
ensure that they remain adequately capitalized and carry out their 
housing finance mission. 12 U.S.C. 1422a(a)(3)(A) and (B). The Finance 
Board previously has described the broad nature of this authority, 
noting that any regulatory actions taken with the intent to enhance the 
safety and soundness of the Banks or to carry out any of the other 
statutory duties are within the legal authority conferred by those 
provisions, unless they would conflict with some other express 
limitations imposed by Congress elsewhere in the Bank Act.\8\ Because 
the Finance Board is adopting this regulation to address its 
supervisory concerns about the risks associated with high levels of 
excess stock, the Finance Board believes that regulation is within its 
authority to ensure the safety and soundness of the Banks under section 
2A of the Bank Act.\9\ The Finance Board similarly believes that there 
is nothing elsewhere in the Bank Act that expressly addresses the issue 
of excess stock that might limit the authority conferred by section 2A 
of the Bank Act.
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    \8\ See Office of General Counsel Opinion, 2004-GC-01, Federal 
Home Loan Bank Securities Registration and Disclosure (June 16, 
2004). This opinion is available at the Finance Board's Web site, 
http://www.fhfb.gov/GetFile.aspx?FileID=457.
    \9\ The Bank Act also authorizes the Finance Board to promulgate 
and enforce any regulations as it believes are necessary to carry 
out the provisions of the Bank Act. 12 U.S.C. 1422b(a)(1).
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    Any analysis of the Finance Board's authority to adopt a regulation 
must consider whether Congress has addressed the precise question at 
issue. If so, the Finance Board must accept the decisions made by the 
Congress. If Congress has not addressed the precise question, the 
Finance Board may do so, provided it does so in the manner permitted 
under the Administrative Procedures Act. See Chevron, U.S.A., Inc. v. 
Natural Resources Defense Council, 467 U.S. 837, 843-844 (1984). With 
regard to this rule, the precise issues are whether Congress has 
established a limit for the amount of excess stock that a Bank may have 
outstanding or otherwise has addressed the ability of the Banks to 
issue excess stock or has expressly assigned the responsibility for 
making these determinations to the Banks or to the Finance Board. In 
the view of the Finance Board, Congress has not expressly addressed 
these issues, and has not delegated to the Banks the sole right to 
determine the degree to which they may create or rely on excess stock 
to capitalize their business. Indeed, the Bank Act largely is silent on 
the matter of excess stock. Even the arguments raised by the commenters 
would require one to infer from various provisions of the Bank Act a 
congressional intent to leave the matter to the discretion of the 
Banks. In the view of the Finance Board, the context of those 
provisions does not suggest such an inference.\10\ In the

[[Page 78050]]

absence of any express provision in the Bank Act addressing the issue 
of excess stock or purporting to limit the authority of the Finance 
Board to act to limit the risks associated with high levels of excess 
stock, the Finance Board is not persuaded that it lacks the legal 
authority to act.
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    \10\ Some commenters contended that section 6(e) of the Bank 
Act, 12 U.S.C. 1426(e), which authorizes the Banks to redeem or 
repurchase stock in excess of a member's minimum stock purchase 
requirement, reflects an intent by Congress to allow each Bank to 
determine how much excess stock it may have outstanding. On its 
face, however, that provision simply authorizes the individual 
Banks, after establishing minimum stock purchase requirements as 
part of their respective capital plans, to redeem or repurchase 
stock that becomes excess due to the ebb and flow of business with 
its members. A better reading of the provision is that it confers 
certain rights on the Banks vis-[agrave]-vis their members with 
regard to the redemption or repurchase of excess stock. The Finance 
Board does not believe that there is any reasonable way to construe 
that provision as reflecting an intent on the part of Congress to 
override the Finance Board's authority to address safety and 
soundness concerns associated with high levels of excess stock. 
Other commenters contended that the grant of incidental powers by 
section 12 of the Bank Act, 12 U.S.C. 1432(a), reflects an intent by 
Congress to allow the Banks to determine the form of any dividend 
paid to their members, i.e., payment in cash or in shares of Bank 
stock, which effectively precludes the Finance Board from limiting 
stock dividends. The Finance Board notes that the provision that 
confers the incidental powers also provides that they must be 
exercised consistently with the other provisions of the Bank Act. In 
the view of the Finance Board, that exception means that even if 
stock dividends are within the incidental powers of the Banks, they 
also are subject to any limits that the Finance Board may impose for 
safety and soundness reasons, as is the case here. Moreover, the 
Finance Board notes that the final rule is considerably less 
expansive than was the proposed rule, in that it bans stock 
dividends only for those Banks that have accumulated more than 1 
percent of their total assets in excess stock, rather than an 
absolute ban, as had been proposed.
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    Agency policy. A number of the commenters contended that the 
proposed rule would have constituted a major change in agency policy, 
reasoning that when the Finance Board approved capital plans allowing 
certain of the Banks to impose a 0 percent stock purchase requirement 
for certain assets, it effectively established a policy to allow each 
Bank to determine its appropriate level of excess stock. Although the 
Finance Board clearly did approve plans that allow for some amount of 
excess stock to be used by the Banks, its prior approvals did not 
purport to address the issue of when the excess stock might pose a 
level of added risk that would raise safety and soundness concerns for 
those Banks, which is the issue addressed by the final rule. Had the 
Finance Board intended to set a policy regarding the appropriate level 
of excess stock, it most likely would have expressed that policy in the 
resolutions issued when approving the capital plans. There is nothing 
in any of the resolutions approving the 12 capital plans, however, that 
remotely suggests that the Finance Board intended to establish a policy 
on excess stock, such as by allowing Banks to accumulate unlimited 
amounts of excess stock or by committing that matter solely to the 
discretion of the Banks.
    In any event, the Finance Board is not bound to adhere to a policy 
if subsequent events make clear the need for change. Recent 
developments at several of the Banks relating to the manner and degree 
to which they have relied on excess stock have made clear to the 
Finance Board that there can be significant risks associated with high 
levels of excess stock. The final rule is intended to address those 
risks in a manner that takes into consideration several of the key 
criticisms posed by the commenters. For example, some commenters 
believed that the proposed rule would have required a Bank to redeem or 
repurchase immediately shares of excess stock above 1 percent of its 
assets, which would have had tax consequences to the members that held 
excess stock as a result of prior stock dividends. Although the 
proposed rule would not have required any Bank to undertake forced 
redemptions or repurchases, the final rule addresses those criticisms. 
The rule does not require a Bank with excess stock above 1 percent of 
its assets to reduce its excess stock. The Finance Board, instead, has 
opted to address its supervisory concerns about excessive levels of 
excess stock by preventing Banks with excess stock above 1 percent of 
their assets from further increasing excess stock beyond current levels 
by paying stock dividends or otherwise issuing excess stock.
    Payment of dividends based on actual earnings. The Finance Board is 
adopting as proposed changes to Sec.  917.9 of its rules that will 
require a Bank to declare and pay dividends based on actual earnings 
and will prohibit a Bank from declaring and paying dividends based on 
anticipated or projected earnings. Other proposed changes that would 
have required a Bank to base dividends on earnings for the calendar 
quarter are not being adopted. Thus, a Bank will be able to declare and 
pay its dividend after consideration of its actual current net earnings 
for any period of its choosing.
    The provision requiring a Bank to base dividends on actual earnings 
appeared to be non-controversial. To the extent the Finance Board 
received comments on this part of the proposed rule, commenters 
generally objected to requiring a Bank to base dividends on calendar-
quarter earnings. As already discussed, the Finance Board is not 
requiring that dividends be tied to calendar quarter earnings, as it 
had proposed.

V. Regulatory Flexibility Act

    The final rule will 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 RFA, 5 U.S.C. 605(b), the Finance Board 
hereby certifies that the final rule will not have a significant 
economic effect on a substantial number of small entities.

VI. Paperwork Reduction Act

    The final rule does not contain any collections of information 
pursuant to the Paperwork Reduction Act of 1995. See 44 U.S.C. 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 900

    Community development, Credit, Federal home loan banks, Housing, 
Reporting and recordkeeping requirements.

12 CFR Part 917

    Community development, Credit, Federal home loan banks, Housing, 
Organizations and functions (Government agencies), Reporting and 
recordkeeping requirements.

12 CFR Part 925

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

12 CFR Part 930

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

0
For the reasons stated in the preamble, the Finance Board is amending 
12 CFR chapter IX as follows:

PART 900--GENERAL DEFINITIONS APPLYING TO ALL FINANCE BOARD 
REGULATIONS

0
1. The authority citation for part 900 continues to read as follows:

    Authority: 12 U.S.C. 1422b(a).

0
2. Amend Sec.  900.2 by adding in alphabetical order, a defined term to 
read as follows:


Sec.  900.2  Terms relating to Bank operations, mission and 
supervision.

* * * * *
    Excess stock means that amount of a Bank's capital stock owned by a 
member

[[Page 78051]]

or other institution in excess of that member's or other institution's 
minimum investment in capital stock required under the Bank's capital 
plan, the Act, or the Finance Board's regulations, as applicable.
* * * * *

PART 917--POWERS AND RESPONSIBILITIES OF BANK BOARDS OF DIRECTORS 
AND SENIOR MANAGEMENT

0
3. The authority citation for part 917 continues to read as follows:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a)(1), 1426, 1427, 
1432(a), 1436(a), and 1440.


0
4. Revise Sec.  917.9 to read as follows:


Sec.  917.9  Dividends.

    (a) A Bank's board of directors may declare and pay a dividend only 
from previously retained earnings or current net earnings and only in 
accordance with any other applicable limitations on dividends set forth 
in the Act or this chapter. Dividends on such capital stock shall be 
computed without preference.
    (b) A Bank's board of directors may not declare or pay a dividend 
based on projected or anticipated earnings and may not declare or pay a 
dividend if the par value of the Bank's stock is impaired or is 
projected to become impaired after paying such dividend.
    (c) The requirement in paragraph (a) of this section that dividends 
be computed without preference shall cease to apply to any Bank that 
has established any dividend preferences for 1 or more classes or 
subclasses of its capital stock as part of its approved capital plan, 
as of the date on which the capital plan takes effect.

PART 925--MEMBERS OF THE BANKS

0
5. The authority citation for part 925 continues to read as follows:

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


0
6. Revise Sec.  925.23 to read as follows:


Sec.  925.23  Excess stock.

    (a) Sale of excess stock. Subject to the restriction in paragraph 
(b) of this section, a member may purchase excess stock as long as the 
purchase is approved by the member's Bank and is permitted by the laws 
under which the member operates.
    (b) Restriction. Any Bank with excess stock greater than 1 percent 
of its total assets shall not declare or pay any dividends in the form 
of additional shares of Bank stock or otherwise issue any excess stock. 
A Bank shall not issue excess stock, as a dividend or otherwise, if 
after the issuance, the outstanding excess stock at the Bank would be 
greater than 1 percent of its total assets.

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

0
7. The authority citation for part 930 is revised to read as follows:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1436(a), 1440, 
1443, and 1446.


Sec.  930.1  [Amended]

0
8. Amend Sec.  930.1 by removing the definition of the term ``excess 
stock''.

    Dated: December 22, 2006.
    By the Board of Directors of the Federal Housing Finance Board.
Ronald A. Rosenfeld,
Chairman.
[FR Doc. E6-22325 Filed 12-27-06; 8:45 am]
BILLING CODE 6725-01-P