[Federal Register Volume 72, Number 3 (Friday, January 5, 2007)]
[Notices]
[Pages 547-565]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-9984]


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FEDERAL HOUSING FINANCE BOARD

[No. 2006-N-10]


Examination Rating System for the Federal Home Loan Banks and the 
Office of Finance

AGENCY: Federal Housing Finance Board.

ACTION: Notice.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is adopting 
an examination rating system known as the Federal Home Loan Bank Rating 
System (Rating System).

DATES: The Finance Board will use the Rating System for all 
examinations that begin after December 31, 2006.

FOR FURTHER INFORMATION CONTACT: Anthony Cornyn, Associate Director, 
Supervision and Examination, Office of Supervision, [email protected] or 
202-408-2522, or Kari Walter, Associate Director, Supervisory and 
Regulatory Policy, Office of Supervision, [email protected] or 202-408-
2829. You can send regular mail to the Federal Housing Finance Board, 
1625 Eye Street, NW., Washington DC 20006.

SUPPLEMENTARY INFORMATION:

I. Background

    In September 2006, the Finance Board published a proposed Rating 
System for the Federal Home Loan Banks (Banks) and the Office of 
Finance (OF) in the Federal Register for public comment. See 71 FR 
55181 (Sept. 21, 2006) (available at the Finance Board's Web site: 
http://www.fhfb.gov/Default.aspx?Page=59&ListCategory=4#4). The 30-day comment 
period closed on October 23, 2006. The Finance Board received 7 
comments (the comments are available at the Finance Board's Web site: 
http://www.fhfb.gov/Default.aspx?Page=93&Top=93). Based on the 
comments, the Office of Supervision revised the Introduction and 
Overview to clarify that the composite rating will be based on the 
relative importance of each component as determined case-by-case within 
the parameters established by the Rating System. The proposal stated 
that the Finance Board would give special consideration to corporate 
governance in assigning a composite rating. Although the importance of 
corporate governance cannot be over-emphasized, our intent is not to 
weight the corporate governance component more heavily than other 
components. Rather than giving special consideration to any one 
component, examiners will use judgment and a case-by-case approach when 
assigning composite ratings. The Office of Supervision made no other 
significant changes to the Rating System as proposed.

II. The Federal Home Loan Bank Rating System

    In 2005, the Office of Supervision began to provide an overall 
conclusion--Satisfactory, Fair, Marginal, or Unsatisfactory--as part of 
its Report of Examination. The Rating System, which is the next step in 
communicating exam results to the Banks, is a risk-focused system under 
which each Bank and the OF is assigned a composite rating from ``1'' to 
``4'' based on an evaluation of various aspects of their operations. 
The composite rating of each Bank is based on an evaluation and rating 
of 5 key components: corporate governance, market risk, credit risk, 
operational risk, and financial condition and performance. The 
composite rating of the OF is based primarily on an evaluation of 2 
components: corporate governance and operational risk. A ``1'' rating 
indicates the lowest degree of supervisory concern, while a ``4'' 
rating indicates the highest degree of supervisory concern. The 
composite rating is based on the ratings of the underlying components, 
which also are rated on a scale of ``1'' to ``4.'' The composite rating 
is not an arithmetic average of the component ratings. Instead, the 
relative importance of each component is determined case-by-case within 
the parameters established by the Rating System.
    Under the Rating System, examiners take administration of a Bank's 
affordable housing and community investment activities into account in 
assigning component ratings for corporate governance and operational 
risk. Given the importance of affordable housing and community 
investment activities to the mission of the Bank System, the Office of 
Supervision may consider the need for a separate rating system or a 
separate ratings component to evaluate and rate the affordable housing 
and community investment programs of each Bank after gaining experience 
with the Rating System.
    The Rating System is intended to serve 2 purposes. First, it is 
designed to reflect in a comprehensive, systematic, and consistent 
fashion the overall condition and performance of an

[[Page 548]]

institution, taking into consideration all significant financial, 
operational, and compliance factors addressed in the Finance Board's 
examination. Second, the Rating System is meant to further enhance 
communication and transparency between the Office of Supervision and 
each Bank and the OF regarding the results of the examination process.
    The ratings for individual Banks and the OF will not be made public 
or released to other Banks, but will be supplied to the individual 
Banks and the OF on a confidential basis as part of the examination and 
supervisory process.
    The Federal Home Loan Bank Rating System is attached as an Exhibit 
to this Notice.

    Dated: December 28, 2006.

    By the Federal Housing Finance Board.
John P. Kennedy,
General Counsel.
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[FR Doc. 06-9984 Filed 1-4-07; 8:45 am]
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