Federal Home Loan Bank System: Key Loan Pricing Terms Can Differ
Significantly (08-SEP-03, GAO-03-973).
The Federal Home Loan Bank System's (FHLBank System) traditional
approach to providing community and housing finance through 12
regional FHLBanks faces continual challenges due to consolidation
in the financial services industry and the emergence of mortgage
lenders with nationwide operations. In addition, the Federal
Housing Finance Board (FHFB), the System's financial regulator,
is analyzing the benefits and costs of potential changes to the
System's membership rules that would make it easier for financial
institutions to join multiple FHLBank districts (referred to as
multidistrict membership). To provide information that would be
helpful in assessing the potential safety and soundness
implications of these developments, GAO was asked among other
items to (1) determine whether key differences exist in the
terms--such as interest rates and collateral requirements--that
FHLBanks make on loans, also known as advances, to member
financial institutions such as banks and thrifts and (2) discuss
FHFB's oversight of the FHLBanks and safety and soundness data
reporting requirements.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-973
ACCNO: A08349
TITLE: Federal Home Loan Bank System: Key Loan Pricing Terms Can
Differ Significantly
DATE: 09/08/2003
SUBJECT: Bank loans
Interest rates
Mortgage interest rates
Mortgage loans
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GAO-03-973
A
Report to Congressional Requesters
September 2003 FEDERAL HOME LOAN BANK SYSTEM Key Loan Pricing Terms Can
Differ Significantly
GAO- 03- 973
Contents Letter 1
Results in Brief 4 Background 8 Statutes and Regulations Establish the
General Pricing and Other
Terms Each FHLBank Can Offer on Advances to Member Institutions 12
Significant Differences Exist in Key Advance Pricing Terms among
the FHLBanks 15 Holding Companies Can Generally Transfer Funds and Assets
among Their Insured Subsidiaries 25 FHFB Has Not Identified Significant
Advance Term Pricing
Deficiencies, but FHLBank Safety and Soundness Data Reporting Can Be
Improved 28 Conclusions 32 Recommendations 33 Agency Comments and Our
Evaluation 34
Appendixes
Appendix I: Objectives, Scope, and Methodology 36
Appendix II: Advance Interest Rates Charged by Specific FHLBanks on
Selected Dates 38
Appendix III: Comments from the Federal Housing Finance Board 39
Appendix IV: Comments from the Federal Home Loan Bank Presidents*
Conference 41
Appendix V: GAO Acknowledgments and Staff Contacts 42 GAO Contacts 42
Acknowledgments 42
Tables Table 1: FHLBank System Assets, as of June 30, 2003 10 Table 2:
Types of Eligible Collateral in the FHLBank System 14
Table 3: FHLBanks* Average Annual Dividend Rates, 1997- 2002 16 Table 4:
Comparison of Selected FHLBank Interest Rates on Fixed
Rate Advances (June 10, 2003) 18 Table 5: Tiered Advance Pricing Programs
at the FHLBanks 19 Table 6: FHLBank Haircuts for Single- Family Mortgage
Collateral
under the Blanket Lien Option 21 Table 7: FHLBank System Borrowing
Capacity Limits 23
Table 8: FHLBanks* Advances Activity Based Stock Purchase Requirements 24
Table 9: FHFB Data on Collateralization and Advances as of December 31,
2002 31
Table 10: Comparison of Selected FHLBank Interest Rates on Fixed Rate
Advances (July 18, 2003) 38 Table 11: Comparison of Selected FHLBank
Interest Rates on Fixed
Rate Advances (July 25, 2003) 38 Figure Figure 1: Location of the 12
Federal Home Loan Banks 9
Abbreviations
CFI Community Financial Institution FDIC Federal Deposit Insurance
Corporation FHLBank Act Federal Home Loan Bank Act FHLBanks Federal Home
Loan Banks FHLBank System Federal Home Loan Bank System FHFB Federal
Housing Finance Board GLBA Gramm- Leach- Bliley Act ORERC Other Real
Estate Related Collateral MPF Mortgage Partnership Finance MPP Mortgage
Purchase Program WAMU Washington Mutual
This is a work of the U. S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.
Letter
September 8, 2003 The Honorable Paul S. Sarbanes Ranking Minority Member
Committee on Banking, Housing, and Urban Affairs United State Senate The
Honorable Richard H. Baker Chairman, Subcommittee on Capital Markets,
Insurance, and Government Sponsored Enterprises Committee on Financial
Services House of Representatives The Federal Home Loan Bank System*s
(FHLBank System) traditional cooperative approach to providing housing and
community finance through 12 regionally based Federal Home Loan Banks
(FHLBank) faces continual challenges due to consolidation in the financial
services industry and the emergence of mortgage lenders with nationwide
operations. Traditionally, each FHLBank made loans, known as advances,
that were
secured by eligible collateral (e. g., single family mortgage loans) to
member institutions* particularly thrifts* located in its district to
support housing finance. However, many large bank and thrift holding
companies now own subsidiaries located in various FHLBank districts. Each
eligible subsidiary may join the FHLBank in which district its
headquarters is located, and may obtain advances from that FHLBank. 1
Thus, these bank and thrift holding companies may, in effect, have access
(through their
subsidiaries) to advances from multiple FHLBanks. 1 Commercial banks,
which may be owned by bank holding companies, were not allowed to join the
FHLBank System until 1989.
Some observers have expressed concerns that these holding companies can
pressure the FHLBanks to compete with one another on advance pricing
terms* such as interest rates and collateral requirements* and that this
competition could impair the overall safety and soundness of the FHLBanks,
which were jointly and severally liable for $710 billion in debt
obligations as of June, 2003. 2 For example, the concern exists that a
holding company could shift assets at a subsidiary located in one FHLBank
district to pledge as collateral at a subsidiary in another district
offering more favorable advance terms. Recently, these concerns have been
heightened as the Federal Housing Finance Board (FHFB), the FHLBank
System*s financial regulator, has analyzed the benefits and costs
associated with potential changes to the System*s membership requirements
that would allow financial organizations to join more than one FHLBank
district (these potential changes to the System*s membership rules are
commonly referred to as multidistrict membership). 3 Supporters of
multidistrict membership believe that it is necessary to modernize the
FHLBank System*s structure, while critics believe that multidistrict
membership would increase the potential for dangerous competition between
the
FHLBanks. As discussed with your staff, this report provides an overview
of advance term pricing requirements and practices within the FHLBank
System that could be useful in assessing the extent of current competition
among the FHLBanks and the potential competitive impacts of multidistrict
membership. Specifically, you asked that we
1. describe the laws and regulations pertaining to the terms that FHLBanks
can offer on advances;
2. provide information on whether key differences exist in current advance
pricing and other terms across the FHLBanks;
2 Joint and several liability means that, with respect to consolidated
obligations, each FHLBank is responsible for its own debt obligations as
well as the debt obligations of the other FHLBanks in the System. If one
FHLBank experienced financial problems, and was unable to satisfy its
repayment obligations, the other FHLBanks would be responsible for
honoring them. 3 Bank or thrift holding companies may establish separately
chartered subsidiaries in two or
more FHLBank districts. Under one concept of multidistrict membership,
financial organizations* such as banks or thrifts* would be able to join
multiple FHLBank districts without establishing separately chartered
institutions.
3. determine whether holding companies face any legal or regulatory
barriers in transferring assets among subsidiaries who are members of
different FHLBank districts; and 4. describe FHFB*s safety and soundness
oversight of the FHLBanks*
advance pricing practices and review selected data that FHFB collects to
monitor safety and soundness practices within the FHLBank System.
To address these objectives, we obtained and reviewed applicable federal
laws and regulations pertaining to the terms that the FHLBanks can offer
on advances. We also interviewed the 12 FHLBank presidents, credit and
collateral staff from 7 of the 12 FHLBanks, and FHFB officials. We sent a
set of structured questions to each of the 12 banks and reviewed their
credit and collateral policies. In addition, we obtained and reviewed
applicable laws and regulations regarding the transfer of funds and assets
among holding companies and their subsidiaries, and interviewed
representatives from the Federal Reserve Board and a large holding
company. The scope of our work included a description of FHFB*s
examination program pertaining to advances but did not include an
analysis of the program*s effectiveness. However, we did analyze FHFB*s
collateral reporting requirements for the 12 FHLBanks. Because the
information contained in this report is potentially sensitive, we
generally do not identify individual FHLBanks in this report. Instead, we
identify each of the 12 banks by the letters A- L. For each report table,
we changed the individual FHLBanks identified by the letters A- L.
Appendix I contains a detailed description of the scope and methodology of
our work.
We conducted our review from January to September 2003 in Washington, D.
C.; New York, New York; Topeka, Kansas; Dallas, Texas; Atlanta, Georgia;
and Pittsburgh, Pennsylvania, and Indianapolis, Indiana, in accordance
with generally accepted government auditing standards.
Results in Brief The Federal Home Loan Bank Act (FHLBank Act), as amended
by the Gramm- Leach- Bliley Act (GLBA), and FHFB regulations establish the
general pricing and other terms that each FHLBank can offer on its
advances to member institutions. The FHLBanks are required to set interest
rates on advances above their borrowing costs and must also factor in
administrative and other expenses. The FHLBank Act and GLBA also require
that each FHLBank take the necessary steps to ensure that its loans are
fully secured by eligible collateral. The eligible collateral includes
cash, residential mortgages, government and agency securities, qualified
nonagency mortgage- backed securities, other real estate related
collateral (ORERC), and small business and agricultural loans or
securities representing a whole interest in such loans held by community
financial institutions (CFI). 4 Within the framework established by
statute and regulation for setting
advance pricing terms and their independent authority within the FHLBank
System, the FHLBanks have implemented several key differences in their
policies, procedures, and practices. First, the FHLBanks have established
sometimes differing formulas and business strategies to determine the
interest rates to be charged on their advances. Moreover, some FHLBank
officials told us that competition from other funding sources can
influence advance interest rates, and some nationwide mortgage lenders
play one FHLBank against another in an attempt to obtain favorable advance
rates. Because of these differing business strategies and competitive
pressures, available evidence indicates that there can be significant
differences in stated advance rates among the FHLBanks for advances with
comparable maturities. Many FHLBanks also charge different rates,
depending upon the size of the advance, while others do not. Second, the
FHLBanks have
established differing collateral requirements for securing advances. 4
Residential mortgages include single- family mortgages* defined as
mortgages financing properties with 1- 4 residential units* and
multifamily mortgages. ORERC includes home equity loans and commercial
real estate loans. Currently, CFIs are insured depository
institutions with assets that do not exceed $538 million. The asset size
limit is adjusted annually for inflation and is based on a 3- year average
of each institution*s total assets.
For example, the FHLBanks may apply differing haircuts to the same types
of collateral (for example, one bank applies a 40 percent haircut to the
book value of single- family mortgage loans pledged as collateral, while
another bank applies a 15 percent haircut). 5 Third, the FHLBanks have
established different advance borrowing capacity limits for their members;
for example, 35 percent of a members* total assets at one FHLBank compared
to 50 percent of assets at another. Fourth, although all 12 FHLBanks
require their members to invest additional capital in the FHLBank based on
their level of advances, the stock purchase requirements can differ (for
example, from 3.5 percent of advances at one FHLBank to 5.0 percent at
another). Holding companies face few direct regulatory restrictions in
transferring assets among their federally insured bank or thrift
subsidiaries who are
members of different FHLBank districts. 6 Sections 23A and 23B of the
Federal Reserve Act and Federal Reserve Regulation W and other federal
laws do impose restrictions on certain transactions (for example,
purchases of assets) between federally insured banks or thrifts and
affiliated companies that are not insured so as to protect the financial
condition of the insured institutions. 7 However, Sections 23A and B and
Regulation W and other federal laws generally exempt qualified insured
banks or thrifts from these requirements when they engage in certain
transactions with one another. 8 According to Federal Reserve officials,
these exemptions reflect the fact that under federal law, a federally
insured institution within a holding company is generally liable for any
losses
5 Haircuts refer to the discounts that the FHLBanks apply to collateral
that is pledged to secure advances. For example if the FHLBank has a 40
percent haircut for single- family mortgage loans, a member bank could
borrow up to 60 percent of the value of the singlefamily mortgage loans
that it pledged as collateral.
6 Most members of the FHLBank System are separately chartered commercial
banks or thrifts, which are insured by the Federal Deposit Insurance
Corporation. 7 Among other requirements, Section 23A imposes quantitative
limits on covered transactions; for example, an insured bank*s covered
transactions with any single affiliate cannot exceed 10 percent of the
bank*s capital stock and surplus, and transactions with all affiliates
combined cannot exceed 20 percent. Section 23B requires that certain
transactions between insured banks and thrifts and uninsured affiliates
take place on market terms. 8 The exemption under 23A applies if the
holding company owns or controls 80 percent or
more of the voting securities of both insured institutions or if one
insured institution owns or controls 80 percent of the voting securities
of the other. Under 23B, transactions between a bank and a nonbank
affiliate are restricted.
incurred by the Federal Deposit Insurance Corporation (FDIC) as a result
of the failure of any other federally insured institution controlled by
the holding company. The exemptions allow insured depository affiliates to
conduct business with each other without needing to comply with financial
restrictions with the understanding that the FDIC can offset its losses
resulting from the failure of one or more insured depository affiliates by
seizing the assets of insured affiliates that do not fail. Although few
direct regulatory restrictions exist to transferring assets, holding
companies may face other hurdles in transferring assets among their
insured depository subsidiaries, such as meeting bank regulatory capital
requirements or the stock purchase requirements of individual FHLBanks. 9
We also note that
the Federal Reserve has not quantified the extent to which transfers of
assets among subsidiaries take place and it is not clear whether holding
companies engage in such transfers to increase competitive pressures
within the FHLBank System.
FHFB carries out its safety and soundness oversight responsibilities for
the FHLBank System by conducting annual examinations and through off- site
monitoring. 10 In 2001 and 2002, FHFB examinations did not identify
significant violations in the FHLBank*s advance term pricing or collateral
practices. However, we identified weaknesses in the data that FHFB
collects from the FHLBanks, which could limit FHFB*s ability to monitor
current and emerging trends within the System. On an annual basis, FHFB
requests that the FHLBanks provide data on collateral securing advances in
order to, along with other items, exhibit the System*s safety and
soundness. Because FHLBank officials do not have clear information about
how FHFB would like the data reported, the FHLBanks use different
reporting definitions and criteria, which limits the data*s analytical
usefulness. Although FHFB officials said that FHFB examiners used the
collateral data during the FHLBank examination process, the agency plans
to study
current data reporting and collection procedures. Moreover, FHFB has not
collected data necessary to assess the current extent of competition
within the FHLBank System and the implications of holding companies with
9 Bank regulators, such as FDIC, impose capital requirements that apply to
the insured subsidiaries of bank or thrift holding companies. In addition,
each member of an FHLBank must purchase capital stock in that FHLBank. We
do not address the potential application of state law to transfers of
assets.
10 Off- site monitoring involves FHFB headquarters staff reviewing
financial data on the FHLBanks on a continual basis. Off- site monitoring
can serve as an effective supplement to the annual examination process by,
for example, identifying rapid changes in FHLBank financial risks and
serving to assist examiners in planning examinations.
subsidiaries that operate in multiple FHLBank districts. By collecting
data on, for example, the advance terms* such as interest rates* that
holding company subsidiaries obtain from different FHLBanks, FHFB would be
in a better position to (1) determine whether competition may affect
FHLBank safety and soundness and (2) assess the potential impacts of
multidistrict membership.
To strengthen its oversight capacity for the FHLBank System, we recommend
that FHFB review the effectiveness of its current collateral data
collection program and work with the FHLBanks to obtain data that are
useful in assessing practices within the System. We also recommend that
FHFB work with the FHLBanks to collect data necessary to assess the
potential effects of competition on the safety and soundness of the
FHLBank System. We provided a draft of this report to FHFB, the FHLBank
Presidents* Conference, and the Board of Governors of the Federal Reserve
System for their review and comment. We received written comments from
FHFB and the FHLBank Presidents* Conference* which are reprinted in
appendixes III and IV--- and technical comments from these organizations
and the Federal Reserve, which have been incorporated where appropriate.
FHFB agreed with the recommendations in the draft report that it review
its data collection and reporting procedures to assess the FHLBanks
collateral practices and competition within the System. The FHLBank
Presidents* Conference commented that statutes and regulations allow
individual FHLBanks to set advance pricing terms that allow the banks to
meet the
needs of their members while continuing to operate in a safe and sound
manner. The Conference also said that they would work with FHFB to collect
revised collateral data.
Background Established in 1932, each FHLBank is a government- sponsored
enterprise (GSE) that is cooperatively owned by its members (see fig. 1
for the
location of the 12 FHLBanks). The 12 FHLBanks, along with the Office of
Finance (which issues debt on behalf of the FHLBanks), comprise the
FHLBank System. The members of each FHLBank must buy stock in the FHLBank
as a prerequisite for obtaining advances and other FHLBank services.
FHLBank System assets consist of advances and investments, such as money
market funds and mortgage- backed securities (see table 1). In addition,
FHLBank assets consist of acquired mortgages that the
FHLBanks purchase from their members under the Mortgage Partnership
Finance (MPF) program or Mortgage Purchase Program (MPP). 11 The FHLBank-
purchased mortgages consist of both conventional mortgages and federally
insured and guaranteed mortgages. 12
11 *Mortgage Partnership Finance* and *MPF* are registered trademarks of
the FHLBank of Chicago. 12 Conventional mortgages do not have federal
insurance or guarantees. FHLBank acquired mortgages are below the
conforming mortgage loan limit, which is currently $322,700 for single-
family properties. Fannie Mae and Freddie Mac, the other two housing GSEs,
also purchase conventional conforming mortgages and issue mortgage backed
securities.
Figure 1: Location of the 12 Federal Home Loan Banks District 7 District 6
Chicago
Indianapolis District 2 District 5
New York Seattle
Cincinnati District 3 Pittsburgh District 12
District 8 Des Moines San Francisco
Boston District 10
Topeka District 1 District 11
Atlanta Dallas
District 4 District 9
Source: FHFB.
Tabl e 1: FHLBank System Assets, as of June 30, 2003
Dollars in billions
Advances Mortgages Investments Other a Total assets
$506 $90 $206 $7 $809
Source: Office of Finance. a These assets include interest bearing
deposits and federal funds sold.
The FHLBank System raises funds in the capital markets partially on the
strength of its ties to the federal government. Due to these ties,
investors perceive an implied guarantee by the federal government on the
System debt based on the belief that the government would come to the
rescue of the FHLBank System rather than allow it to default on its
obligations in the event of severe financial difficulties. The primary
source of funds for the FHLBank System is the issuance of debt securities
known as consolidated obligations, through its Office of Finance, which
stood at $710 billion as of
June 30, 2003. Consolidated obligations are the *joint and several*
obligations of the FHLBanks and all of the banks may be required to cover
such obligations of another bank that defaults on its repayment
obligations. Under the joint and several structure, the potential for
moral hazard exists. That is, FHLBanks may have incentives to take
financial risks knowing that
their losses would be covered by other FHLBanks or, ultimately, the
federal government. Federal statutes and regulations as well as FHFB*s
oversight efforts* which are discussed in this report* are designed to
help ensure that the FHLBanks conduct their business in a safe and sound
manner.
The FHLBank Act provides that an eligible institution may become a member
only of the FHLBank district in which its principal place of business is
located, or an adjoining district for convenience purposes and if approved
by FHFB. However, bank or thrift holding companies may own subsidiaries in
two or more FHLBank districts and each eligible subsidiary may become a
member of its district FHLBank. To become a FHLBank member, each
subsidiary must be a separately chartered institution, such as a national
bank or state- chartered bank or thrift. According to FHFB, approximately
100 bank or thrift holding companies currently operate in
two or more FHLBank districts by having established separately chartered
subsidiaries in those districts.
In 2000 and 2001, continuing a long standing trend, several holding
companies with subsidiaries that operated in two or more FHLBank districts
merged with or purchased financial institutions that were also
members of FHLBank districts. These holding companies sought to
consolidate the merged or purchased institutions under one existing
charter and did not want to maintain separately chartered institutions.
For
example, Washington Mutual (WAMU)* a thrift holding company with
subsidiaries in the Seattle, San Francisco, and Topeka FHLBank districts*
purchased Bank United, a member of the Dallas FHLBank district, and Dime
Savings, a member of the New York FHLBank district. WAMU chose not to
maintain separate charters for Bank United and Dime Savings for business
purposes and instead decided to merge the institutions into its existing
subsidiaries. However, under FHFB regulations Dime Savings and Bank United
could no longer remain members of the FHLBank System and could no longer
obtain new advances or other services from the FHLBank of Dallas and the
FHLBank of New York. Therefore, WAMU was required to pay back Bank United
and Dime Savings* outstanding balances under their original terms.
In 2000, the FHLBank of Dallas submitted to the FHFB an application (which
the FHFB subsequently treated as a petition) to grant approval to WAMU*s
thrift subsidiary*s application for membership in the FHLBank of Dallas
while maintaining its membership in the FHLBank of San Francisco (the
petition has been referred to as advocating multidistrict membership). The
Dallas FHLBank filed the petition under the *demanded by convenience*
standard. 13 After the initial petition, FHFB received similar requests
from three other FHLBanks, requests to intervene, and comment letters both
in favor and against. 14 Given the controversy associated with these
petitions and their potential effects on the System (including the
potential for increased competition among the FHLBanks), FHFB did not act
on them and, in October 2001, requested comments from the public on the
petitions. In 2002, FHFB obtained a legal opinion from a law firm
stating that it had the legal authority, under certain conditions, to
approve 13 The FHLBank of Dallas requested that the WAMU thrift subsidiary
belong to both the San Francisco and Dallas districts. FHLBank Dallas
interpreted the phrase in the FHLBank Act stating that a member can join
the district where it is headquartered or an adjoining district if
demanded by convenience as meaning the WAMU subsidiary could join both
districts without establishing a separately chartered subsidiary in
Dallas. Traditionally, the phrase has been understood to mean a FHLBank
member can join either the district where it is
headquartered or the adjoining district, but not both. 14 A member,
FHLBank, or the Office of Finance may file a request to intervene in the
consideration of the petition, in support or against, if it believes its
rights may be affected. These requests must include a statement of the
facts, a description of the relief requested, and be filed with the
Secretary to the Federal Housing Finance Board within 45 days from the
date the petition is filed.
multidistrict membership under its broad safety and soundness regulatory
authority and requested that the 12 FHLBanks answer questions related to
multidistrict membership, which the FHLBanks did by February 2003. During
2003, FHFB staff, at the direction of the agency*s chairman,
analyzed the benefits and costs associated with multidistrict membership.
Statutes and
The FHLBank Act, as amended by GLBA, and FHFB regulations establish the
general pricing and other terms that each FHLBank can offer on its
Regulations Establish
advances. 15 Statutory and regulatory provisions establish requirements
for the General Pricing and
FHLBank pricing on advances, allow for price differentiation at the Other
Terms Each
FHLBanks, require that advances must be fully secured, and establish
FHLBank Can Offer on
eligible types of collateral. FHFB regulations establish more specific
requirements to help ensure that the FHLBanks conduct their advance
Advances to Member business in a safe and sound manner.
Institutions General Requirements for
According to FHFB regulations issued pursuant to the FHLBank Act, Terms on
Advance Pricing FHLBank advances may not be priced below the marginal cost
to the FHLBank of raising matching term and maturity funds in the
marketplace, including embedded options, plus the administrative and
operating costs associated with making advances. 16 FHLBanks are allowed
to differentiate in advance prices based on the FHLBank*s assessment of
the credit and other risk of lending to any particular member, or other
reasonable criteria.
15 Section 7( j) of the FHLBank Act (12 U. S. C. 1427( j)) requires that
each Bank's board of directors administer the affairs of the Bank "fairly
and impartially and without discrimination in favor of or against a
member," and section 9 of the FHLBank Act (12 U. S. C. 1429) provides that
a Bank "may at its discretion deny any such application (for an advance)
or may grant it on such conditions as the (Bank) may prescribe."
16 12 C. F. R. 950.5( b)( 1).
Per FHFB*s guidance, such differentiation could include providing
discounts to members based on the volume of the advance. 17 Each FHLBank
is to include in its member products policy standards and criteria
for differential pricing and is to apply its standards and criteria
consistently and without discrimination to all members.
The FHLBank Act, as amended by GLBA, requires that FHLBanks fully secure
their advances with eligible collateral. The eligible collateral, as
listed in table 2, ranges from whole single family mortgages to small
business and agricultural loans. 18 GLBA, which amended the FHLBank Act,
expanded the collateral that member institutions could use to secure an
advance. In particular, GLBA allowed CFIs, those FHLBank System members
that are FDIC insured depository institutions that currently have $538
million or less in total assets, to pledge small business and agricultural
loans as collateral. GLBA allowed CFIs to use the expanded collateral
categories because some small institutions lacked a sufficient quantity of
other types of assets* such as mortgage loans* necessary to secure FHLBank
advances. GLBA also allowed all FHLBank members to make
greater use of ORERC* such as commercial real estate loans and home equity
loans* as collateral for advances. The FHLBanks may restrict the types of
eligible collateral available to them as security, based upon the
creditworthiness or operations of the borrower, the quality of the
collateral, or other reasonable criteria.
17 According to the preamble to the final rule on advances, published May
20, 1993, 58 FR 29456, the Board concluded that the extension of credit to
FHLBank members based on the member's creditworthiness, or other
reasonable criteria applied equally to all members, does not constitute
"discrimination" under 7( j) of the FHLBank Act. The Board also approved
risk based pricing, stating, "risk based pricing of advances should
enhance the fairness of the Banks' credit programs, since the terms of
advances to more creditworthy members should be more favorable than those
to members posing a greater credit risk to a Bank." In addition, the Board
approved of differential pricing of advances based upon criteria other
than risk, subject to the application of consistent standards to all
borrowing members. The preamble cited the fact that *certain Banks have
offered *volume discounts* to members who finance a certain percentage of
their total assets with Bank advances,* as an example of allowable
differential pricing. 1993 WL 167293 (F. R.)
18 Single- family mortgages are mortgages on dwellings that include
condominiums, planned unit developments, townhomes, and qualified mobile
homes affixed to the land. The FHLBanks typically prefer that these
mortgages are on owner- occupied dwellings.
Tabl e 2: Types of Eligible Collateral in the FHLBank System
1. Fully disbursed, whole first single- family or multifamily mortgages on
improved residential property (not more than 90 days delinquent), or
securities representing a whole interest in these mortgages. 2. Securities
issued, insured, or guaranteed by the United States or a U. S. agency,
including mortgage- backed securities issued by Fannie Mae or Freddie Mac.
a
3. Cash or deposits at a FHLBank. 4. Other real estate related collateral,
such as home equity loans or commercial real estate, acceptable to the
FHLBank and subject to certain conditions.
5. Secured loans for small business, agriculture, or securities
representing a whole interest in such secured loans, in the case of any
CFI.
Source: FHLBank Act as amended. a As part of their business activities,
Fannie Mae and Freddie Mac issue mortgage- backed securities.
By fully securing advances with eligible collateral as required by the
FHLBank Act, FHLBanks can protect their interests should one or more of
their members fail. Typically, FHLBanks make advances on what is known
as a blanket lien; that is, the FHLBank has the authority to take control
of all the assets that are eligible as collateral on a member*s books. In
cases in which an FHLBank determines that a member is experiencing
financial difficulty, the FHLBank may require the member to list specific
assets that are securing advances or may even require the member to
deliver the
collateral to the FHLBank. 19 Should the member fail, the FHLBank can sell
the pledged collateral to ensure repayment of principal and the interest
on the advance. Due in part to the collateralization requirements, the
FHLBank System has never experienced a loss on an advance. FHFB
Regulations Establish
FHFB has issued several regulations that are designed to help ensure that
Additional Advance Term the FHLBanks make advances in a safe and sound
manner. For example, Requirements FHFB has established regulations
pertaining to the use of ORERC and small business and agricultural loans
as collateral, which are generally considered riskier than other forms of
collateral, such as single- family mortgages. FHFB regulations require
that FHLBanks can reliably discount the value of ORERC and small business
and agricultural loans pledged as collateral. Under its regulations, FHFB
also has the authority to require an
19 Many FHLBanks also have several non financial triggers that require
specific listing or delivery of assets that are pledged as collateral.
FHLBank to increase its standards for all forms of eligible collateral.
FHFB requires through regulation that FHLBanks take the necessary steps to
ensure that collateral is secure and to establish written procedures for
verifying the existence of collateral. Significant Differences
Although the FHLBank Act and FHFB regulations establish the advance Exist
in Key Advance
pricing framework, each FHLBank has independent authority within the
framework to establish specific policies and procedures to meet its
Pricing Terms among
business and member requirements. Our review of key advance pricing the
FHLBanks
terms* advance interest rates, collateral requirements, advance borrowing
capacity, and capital stock purchase requirements* identified several
significant differences among the 12 FHLBanks. The FHLBanks may charge
different interest rates on advances with comparable maturities, some may
establish interest rates on the basis of advance size while others do not,
and the FHLBanks apply differing haircuts to the same type of collateral,
establish different borrowing limits, and require members to purchase
FHLBank stock in differing amounts depending upon their levels of advances
outstanding.
Advance Interest Rates May The process of setting advance interest rates
can depend on several key
Vary Based on FHLBank factors, including cost of funds, operating
expenses, business strategies,
Operating Costs, Business and competition from other sources, and may
differ from one FHLBank to
Strategies, and Competition another. In general, each FHLBank attempts to
set advance interest rates
at a level that covers its costs* including cost of funds and operating
from Other Sources
expenses* while allowing for the payment of a reasonable rate of return
(typically through the payment of dividends) to member institutions.
Although the FHLBanks generally have the same cost of funds because they
borrow through the Office of Finance, they may have different operating
expenses to administer their advance business. 20 Moreover, the business
strategies adopted by individual FHLBanks may also influence the advance
interest rates that they charge to members. In particular, FHLBank
officials said that there can be a connection between the advance interest
rate that they charge and the dividend rate that they pay. That is, an
FHLBank choosing to pay a relatively high dividend may need to charge a
relatively high advance rate to earn sufficient profits to cover the costs
20 Total FHLBank System operating expenses of $396 million are very small
compared to other expenses, such as interest expenses, which totaled
nearly $18 billion in 2002.
associated with the dividend. In contrast, other FHLBanks may decide to
provide value to their members through lowering their advance rates, which
may mean a decrease in their dividend. Table 3 shows that some
FHLBanks consistently pay higher dividends than others. For example, Bank
E paid an average dividend of 7.63 percent from 1997 through 2002, which
was 250 basis points higher than the average dividend of Bank L over
the same period. Tabl e 3: FHLBanks* Average Annual Dividend Rates, 1997-
2002 FHLBanks 1997 1998 1999 2000 2001 2002 Average Rank
A 6.1 5.76 5.36 7.17 5.99 5.45 5.97 10 B 6.82 6.63 6.69 7.38 6.34 5.25
6.52 6 C 6.48 6.4 6.54 7.63 5.87 3.68 6.10 9 D 7 6.63 6.3 6.92 4.45 3 5.73
11 E 7.99 8.01 8 8.25 7.44 6.06 7.63 1 F 7.25 7.38 7.13 8.03 6.78 4.56
6.86 4 G 6.6 7.25 6.8 6.95 6.29 4.51 6.40 7 H 7.19 7.19 7.06 7.34 6.75
4.63 6.69 5 I 7.69 7.69 7.36 6.5 6.88 5.98 7.02 2 J 6.38 6.5 6.63 7.06 6.5
3.56 6.11 8 K 7.25 7.44 7.56 7.75 6.75 5.31 7.01 3 L 5.95 5.92 5.5 6.36
4.13 2.94 5.13 12 Source: FHLBanks.
Note: The A- L listing of the FHLBanks in this table differs from the A- L
listings in other tables in this report.
FHLBank business strategies involving other assets* such as mortgage
purchase programs and other investments* may also influence the interest
rate that they charge on advances. For example, the potential exists that
the degree to which an FHLBank participates in the MPP or the MPF
program would affect its advance interest rate. If an FHLBank commits
substantial resources to the MPP or the MPF program, it may use any
profits earned to offset the advance interest rate or it may use funds
earned from advances to support the MPP or MPF program. Or, the FHLBank
could use the profits to pay a higher dividend and leave advance rates
unchanged or some combination thereof. Available evidence suggests that
there is wide variation within the FHLBank System on the extent to which
individual banks participate in the asset purchase programs. For example,
more than 46 percent of the assets at one FHLBank now consist of acquired
mortgages while the ratio is only 1.5 percent at another FHLBank.
Similarly, FHLBanks could also increase investments in other types of
assets, such as mortgage- backed securities, and use the income derived to
offset advance interest rates or pay a higher dividend.
Some FHLBank officials told us that competition from other sources can
also influence the interest rates that they charge on advances. For
example, officials said that they monitor other financial markets* such as
the repo market* to determine how competitive their advance rates are with
other funding sources. 21 In addition, some FHLBank officials said that
competition may also arise from the advance interest rates and other terms
offered by other FHLBanks. The officials said that large bank or thrift
holding companies that have subsidiaries in multiple FHLBank districts
sometimes play one FHLBank against another in an attempt to obtain more
favorable advance pricing terms. Some FHLBank officials said that they
will adjust their advance interest rates within established parameters to
ensure that their rates are competitive with other sources of funds. An
individual FHLBank*s willingness to compete with other fund providers
could influence differences in advance rates across the FHLBanks.
Given the variety of factors that may be involved in setting advance
interest rates, we are unable to explain completely why individual
FHLBanks charge the rates that they do. Nevertheless, limited available
data indicate
that these factors result in sometimes significant differences in interest
rates on advances with comparable maturities. Table 4 shows the advance
interest rates for eleven FHLBanks on June 10, 2003 (the other FHLBank
stated that its advance interest rate data were proprietary). The
differences between the lowest and highest interest rates can be
significant. For example, for an advance of 12 months, the difference
between Bank H and D was 36 basis points.
21 A repurchase agreement, commonly referred to as a *repo,* is a
transaction in which a dealer in effect borrows money by selling
securities and simultaneously agreeing to buy them back at a higher price
at a later time.
Table 4: Comparison of Selected FHLBank Interest Rates on Fixed Rate
Advances (June 10, 2003) a Difference in basis Term Bank A Bank B Bank C
Bank D Bank E Bank F Bank G Bank H Bank I Bank J Bank K Range
points
12 mo. 1.16 1.29 1.10 1.43 1.37 1.29 1.22 1.07 1.31 1.3 1.41 1.07- 1. 43
36 24 mo. 1.42 1.45 1.35 1.62 1.58 1.51 1.46 1.36 1.56 1.55 1.62 1.35- 1.
62 27 36 mo. 1.75 1.82 1.74 1.92 2.01 1.88 1.79 1.71 1.91 1.9 1.95 1.71-
2. 01 30 48 mo. 2.16 2.27 2.18 2.39 2.42 2.27 2.21 2.21 2.39 2.3 2.36
2.16- 2. 42 26 60 mo. 2.53 2.58 2.53 2.71 2.79 2.63 2.58 2.55 2.74 2.66
2.72 2.53- 2. 79 26 Source: Selected FHLBanks.
Note: The A- K listing of the FHLBanks in this table differs from the
alphabetic listings in other tables in this report. a The interest rates
shown are generally for regular fixed term and rate advances with no
discounting.
We also obtained advance interest rate data from the FHLBanks on July 18
and 25, 2003 to replicate our results (see app. II). The FHLBanks also
differ in their policies regarding payment frequency and daycount accrual
methods. No attempt is made here to harmonize the data to a single payment
frequency and daycount accrual standard.
Due to our reporting deadlines, the scope of our work did not involve
obtaining comparable historical data on the advance interest rates charged
by individual FHLBanks. We obtained the data from the Web sites of nine
FHLBanks while two other FHLBanks provided the data separately. One
FHLBank stated that its advance interest rate data were proprietary. Of
the nine FHLBanks that do publish advance interest rate data on their Web
sites, some publish historical data while others do not. Of banks that do
report historical rate data, some use different and incomparable reporting
methodologies. Additionally, the FHLBanks reserve the right to negotiate
with members on advance interest rates; therefore, the advance interest
rates posted on the FHLBanks Web sites may or may not be the rate paid by
all members. Most FHLBanks Offer
Our review indicates that eight FHLBanks have established specific
Discounts on Advance Rates
programs that offer volume- driven advance rate discounts, while four
Based on Volume
others have not established such programs (see table 5). Under these
programs, also referred to as tiered pricing, the FHLBank may reduce the
standard interest rate charged on advances depending upon the size of the
advance. The programs operate similarly as each passes on to members the
economies of scale the FHLBanks realize from high- volume transactions.
However, as table 5 illustrates, the number of pricing tiers at each
FHLBank varies; three banks have established two tiers, two banks have
established three tiers, two banks have established four tiers, and one
bank states that it provides volume- driven discounts. The basis point
discounts that the FHLBanks offer on volume driven discounts can also
vary. For example, one FHLBank reduces its advance rates 15 to 20 basis
points for advances over $25 million, while another FHLBank reduces its
advance interest rates 6 to 12 basis points.
Tabl e 5: Tiered Advance Pricing Programs at the FHLBanks FHLBanks Tiered
pricing (Y/ N) Tiered pricing program descriptions
Bank A No Bank B Ye s 2 Tiers: Advances under $25 million
Advances over $25 million Bank C No Bank D No Bank E Ye s Volume discounts
on large advances Bank F Ye s 2 Tiers: Advances under $10 million
Advances $10 million and over Bank G Ye s 2 Tiers: Advances under $25
million
Advances $25 million and over Bank H Ye s 4 Tiers: Advances $5- 24 million
Advances $25- 49 million Advances $50- 99 million Advances $100 million
and over Bank I Ye s 4 Tiers: Advances under $10 million
Advances $10- 24 million Advances $25- 99 million Advances $100 million
and over
Bank J Ye s 3 Tiers: Advances under $5 million Advances $5- 25 million
Advances over $25 million Bank K Ye s 3 Tiers: Advances for less
creditworthy members
required to deliver collateral Advances under $10 million (standard
pricing tier) Advances over $10 million Bank L No
Source: FHLBanks. Note: The A- L listing of the FHLBanks in this table
differs from the A- L listing in other tables in this report.
FHLBank officials said that their large members are the primary
beneficiaries of the tiered pricing programs because they have the
capacity to borrow in large volumes. However, officials from two FHLBanks
also
said that they will aggregate advance requests from smaller members so
that they can benefit from volume- driven rates as well. Representatives
from several FHLBanks, including those that do not have tiered pricing
programs, said that they also periodically offer *special deals* on
advance rates to all of their members. If a FHLBank, for example, obtains
favorable borrowing costs, it may pass these savings on to its members
through special deals that are announced by fax or e- mail.
With respect to the four FHLBanks that do not have specific tiered pricing
programs, officials said that they preferred to offer the same advance
rate to all members. Although these FHLBanks do not have specific tiered
pricing programs based on volume, they may differentiate in price in other
ways. For example, one FHLBank offers standard rates on all advances
requested by telephone but offers specified discounts on advance requests
made through its secured Web site. Officials from this bank said that more
than 98 percent of its advances are made through the Web site. Banks that
do offer tiered pricing programs may also offer differing advance rates on
the basis of the creditworthiness of their members. For example, one
FHLBank has established 10 separate categories that have different
interest rates and collateral requirements depending upon a member*s
creditworthiness. This FHLBank, as do other FHLBanks, establishes
members* creditworthiness through, among other steps, reviewing publicly
available financial information and conducting on- site visits to review
collateral management practices.
We also note that analyzing the FHLBanks* tiered pricing programs was
difficult, because the programs are not fully transparent as some banks
*negotiate* prices with larger members. Some FHLBank officials said that
larger members periodically request advance terms that differ from posted
rates and that FHLBank representatives do have some authority to customize
deals. For example, officials at one FHLBank said that its representatives
had the authority to negotiate the stated advance interest rates. None of
the FHLBank officials we contacted said that they had authority to
negotiate based on collateral standards. Some FHLBank officials said that
they notify their members of the terms of negotiated transactions whenever
they take place (for example, by e- mail). Other FHLBank officials said
that they will make the terms of negotiated deals available only when
another member requests an advance with similar features.
FHLBanks Have Established The FHLBanks may also apply differing haircuts
to collateral pledged by
Sometimes Differing member institutions to secure advances. Table 6 shows
the haircuts that
Collateral Requirements for the FHLBanks apply under their blanket liens
to single- family mortgage
Securing Advances collateral, which is considered one of the most secure
forms of collateral. Several FHLBanks apply a range of haircuts to single-
family collateral (for
example, FHLBank C) based on their assessments of the credit risk of the
collateral. For those banks that apply one haircut to single- family
collateral, the haircut differences can be significant. For example, a
member could borrow up to 85 percent of its pledged single- family
collateral at FHLBank L (which has a 15 percent haircut) but only up to 60
percent at FHLBank J (which has a 40 percent haircut). We note that the
FHLBanks have established other advance borrowing limits for their
members, which are discussed in the next section.
Tabl e 6: FHLBank Haircuts for Single- Family Mortgage Collateral under
the Blanket Lien Option
FHLBanks Collateral haircut a
Bank A 9 -20% b Bank B 20% c Bank C 20- 43% d Bank D 17% Bank E 25% Bank F
25% or more Bank G 17- 44% e Bank H 31 or 40% f Bank I 31% Bank J 40% Bank
K 25% Bank L 15% Source: FHLBanks. Note: The A- L listing of the FHLBanks
in this table differs from the A- L listing in other tables in this
report. a The FHLBanks use different methods to reflect the percentage
haircut requirement on collateral. We have converted their different
measures to one consistent standard for purposes of comparison.
Eleven of the 12 FHLBanks generally apply haircuts to the book value of
eligible collateral, while one has established a methodology to apply
haircuts to the fair market value of the collateral. b Haircut depends
upon the creditworthiness of the member.
c Bank determines fair market value of collateral. The Bank will use "book
value" as fair market value for nondelivered, nonsecurities collateral
where a fair market value estimate is unavailable. d Range depends on a
creditworthiness assessment rating.
e The haircut depends upon the relative riskiness of the collateral. f
Amount reflected is for reviewed loans that have either an adjustable rate
(31%) or a fixed rate (40%).
Our review also identified other differences in the FHLBanks collateral
standards. For example, we found that several FHLBanks require or prefer
their members to pledge all of their single- family mortgages as
collateral before they will consider the use of other types of collateral*
such as ORERC or small business and agricultural loans* to secure
advances. In contrast, other FHLBanks allow members to pledge any form of
eligible collateral* such as commercial real estate loans* to secure
advances without requiring that other types of eligible collateral be used
first.
Borrowing Capacity Limits To minimize the risks associated with making
advances to their members,
Vary Across the FHLBanks the FHLBanks have also established borrowing
capacity limits, which can
vary. Table 7 shows that three FHLBanks allow their members to obtain
advances equal to the value of all their eligible collateral after
appropriate haircuts have been applied. These FHLBanks borrowing limits do
not
include a specific limit on the ratio of advances to a member*s total
assets as is the case at the other nine banks. Of the nine banks with
specific ratio limits, the borrowing limits vary to some extent; for
example, one FHLBank sets total advance borrowings at 35 percent of a
member*s assets. Other FHLBanks may allow members to borrow up to 50
percent of their total assets without board approval and, in one case, up
to 55 percent if approved by the bank president. The borrowing capacity of
individual members is determined on a case- by- case basis depending on
the creditworthiness of the member and the member*s collateral.
Tabl e 7: FHLBank System Borrowing Capacity Limits FHLBank Member bank
borrowing capacity (BC) limits a
Bank A Total eligible collateral after appropriate discounts. Bank B 40
percent of total assets.
Financial status may dictate a lower BC. Bank C Total eligible collateral
multiplied by appropriate haircut, minus the
member bank*s obligations. Bank D 40 percent of total assets, up to 55
percent if approved by the bank
president. Bank E 50 percent of member's total assets. Financial status
and/ or collateral requirements may dictate a higher/ lower
BC. Bank F Overall credit exposure to total assets may not exceed 50
percent. Bank
may apply additional borrowing limits as applicable. Bank G Bank assigns
borrowing capacity percentage to eligible collateral. Bank H 50 percent of
a member's total assets, higher with consent of the board. Bank I Total
eligible (unpledged) collateral after appropriate haircuts. Bank J 40
percent of total assets. Bank K 50 percent of adjusted assets (member*s
assets minus borrowings from all sources).
Bank L Under blanket lien, total secured borrowings must be less than 35
percent of total assets. Single- family mortgage loans should equal at
least 10 percent of total assets.
Source: FHLBank policy manuals and interviews with FHLBank officials.
Note: The A- L listing of the FHLBanks in this table differs from the A- L
listing in other tables in this report. a Capacity limits established by
banks are always subject to the amount of eligible collateral held by a
member.
FHLBanks Require FHLBanks have also established activity based stock
purchase
Members to Purchase requirements for advances, which can differ (see table
8). 22 As the table
Different Amounts of indicates, the specific capital ratio requirements
can differ; for example, Capital Stock Depending
FHLBank L has a 3.5 percent stock purchase requirement while FHLBank G has
a 5 percent requirement. upon Advance Activity
Tabl e 8: FHLBanks* Advances Activity Based Stock Purchase Requirements
FHLBank Capital requirement a
A 4.7% B 4.75% C 4.5% D 2 * 4% b E 4.5% F 4.25% G 5% H 4.5% I 4.45% J 4.5%
K 5% L 3.5% Source: FHLBanks. Note: The A- L listing of the FHLBanks in
this table differs from the A- L listing in other tables in this report. a
FHFB has approved new capital plans for all 12 FHLBanks. These plans
include the capital
requirements for each of the FHLBanks. The table reflects the approved
capital requirements of the 12 FHLBanks. As of the time of this report, 5
banks have implemented their new requirements. The FHLBank boards of
directors set ranges of capital to advances ratios, and then choose a
specific ratio of capital stock that members are required to meet when
taking out advances. Only the specific ratios are shown in the table.
22 These activity based capital requirements are in addition to minimum
membership requirements for being a member of a FHLBank. Each FHLBank
requires its members to invest capital based on the amount of advances
they have outstanding. FHLBank boards of directors typically set ranges of
capital to advances ratios. FHLBank boards of directors also typically set
specific ratios within the range that members are required to meet when
taking out advances. Members must comply with the activity- based
requirement as long as the relevant activity remains outstanding,
including periods beyond the termination of the member*s membership in a
FHLBank. The advances investment requirements are calculated daily and
each time a member enters into a new advances transaction.
b The FHLBank*s advance activity capital requirement range of 2 to 4
percent has been set by its board within a larger range of 1 to 6 percent.
The capital requirement within the 2 to 4 percent range is based on the
extent of the excess stock held by each member and the FHLBank at any
particular point in time. The member may use (borrow) FHLBank excess stock
under certain conditions rather than purchase additional stock, which
could make the FHLBank overcapitalized.
Holding Companies Although Section 23A and 23B of the Federal Reserve Act
and Regulation W
Can Generally Transfer impose restrictions on the transfer of assets among
some subsidiaries of
holding companies, these restrictions generally do not apply to transfers
of Funds and Assets assets between depository institution subsidiaries
that are federally
among Their Insured insured. 23 Accordingly, each of the more than 100
holding companies that
Subsidiaries have federally insured bank or thrift subsidiaries that are
members of
various FHLBank districts may be able to transfer assets among their
insured depository subsidiaries with few restrictions under specified
conditions. However, holding companies may face some hurdles* such as
managing their balance sheets or meeting capital requirements* when
transferring assets from one insured subsidiary to another. We also note
that the Federal Reserve has not quantified the extent to which transfers
of assets among subsidiaries take place, and it is not clear whether
holding companies engage in such transfers to increase competitive
pressures within the FHLBank System.
Sections 23A and 23B of the Sections 23A and 23B of the Federal Reserve
Act set limits on covered
Federal Reserve Act Limit transactions between a depository institution
and its affiliates. 24 Sections
Transactions between 23A and 23B are designed to protect against a
depository institution
Affiliates suffering losses in transactions with affiliates. They limit
the ability of a
depository institution to transfer to its affiliates the subsidy arising
from the institution*s access to the federal safety net, including the
deposit insurance funds. Under section 23A, a bank*s affiliates include,
among
23 12 U. S. C. 371c, 12 U. S. C. 371c- 1 and 12 C. F. R. Part 223. Section
11( a)( 1) of the Home Owners* Loan Act, 12 U. S. C. 1468( a)( 1),
generally applies sections 23A and 23B of the Federal Reserve Act to every
savings association in the same manner and to the same extent as if the
savings association were a member bank of the Federal Reserve System. The
Office of Thrift Supervision has issued proposed regulations on
transactions with affiliates that reflect Regulation W.
24 A *covered transaction* is defined as a loan or extension of credit to
an affiliate, the purchase of or investment in securities issued by an
affiliate, the purchase of assets from an affiliate, acceptance of
securities issued by an affiliate as collateral security for a loan or
extension of credit, issuance of a guarantee, acceptance, or a letter of
credit on behalf of an affiliate.
other companies, any companies that control the bank, any companies under
common control with the bank, and certain investment funds that are
advised by the bank or an affiliate of the bank. Affiliate has the same
meaning under 23B as the meaning given under 23A, except that the term
affiliate under 23B does not include an insured bank or an insured savings
association.
According to Section 23A, a bank*s covered transactions with any single
affiliate cannot exceed 10 percent of the bank*s capital stock and
surplus, and transactions with all affiliates combined cannot exceed 20
percent of the bank*s capital stock and surplus. All transactions between
a bank and its affiliates must be on terms and conditions that are
consistent with safe and sound banking practices, and a bank cannot
purchase low quality assets from its affiliates. Finally, section 23A
requires that a bank*s extensions of credit to affiliates and guarantees
on behalf of affiliates be appropriately secured by a statutorily defined
amount of collateral. Section 23B requires that certain transactions
between a bank and its
affiliates occur on market terms. This is defined to mean that the
transaction must take place on terms and under circumstances that are
substantially the same, or at least as favorable to the bank, as those
prevailing at the time for comparable transactions with unaffiliated
companies. Transactions that are covered by 23A and 23B include (1)
purchases of
assets by a bank from an affiliate, (2) extensions of credit by a bank to
an affiliate, (3) investments by a bank in securities issued by an
affiliate, (4) guarantees by a bank on behalf of an affiliate, and (5)
certain other transactions that expose the bank to an affiliate*s credit
or investment risk. Section 23B also applies to any sale of assets by the
bank to an affiliate, any payment of money or furnishing of services by
the bank to an affiliate, and any transaction by the bank with a third
party if an affiliate has a financial interest in the third party or in an
affiliate that is a participant in the transaction.
Sister Banking Exemption Section 23A exempts several types of transactions
from certain aspects of Allows Transfer of Assets
the statute. One exemption, known as the Sister Bank Exemption, exists
among Subsidiaries of Bank
for transactions between a bank or thrift and another bank or thrift if a
and Thrift Holding
company controls 80 percent or more of the voting securities of both banks
or thrifts or if one bank controls 80 percent or more of the voting
securities Companies
of the other. The exemption applies only to transactions between insured
depository institutions. Because Section 23B exempts banks and thrifts
from its definition of affiliate, sister banks (those banks that qualify
for the exemption) are also exempt from the requirement that transactions
between insured banks or thrifts and their affiliates be conducted on an
arm*s length basis. According to the Federal Reserve, these exemptions
reflect the fact that, under the cross- guarantee provisions of the
Federal Deposit Insurance Act, an insured depository institution is
generally liable for any loss incurred by the FDIC in connection with the
default of a commonly controlled depository institution. All transactions
between a bank and its affiliates (including sister bank affiliates) are
required, though, to be on terms and conditions that are consistent with
safe and sound banking practices. 25 In addition, a bank may not purchase
a low- quality
asset from an affiliate (including a sister bank affiliate) unless the
bank or its subsidiary, pursuant to an independent credit evaluation,
committed itself to purchase such asset prior to the time such asset was
acquired by the affiliate. Although a Federal Reserve official could not
provide specific
data on the number of insured holding company subsidiaries that qualify
for the exemption, he estimated that more than 90 percent do so.
While Sections 23A and 23B and Regulation W impose few legal restrictions
on holding companies selling assets among their insured depository
subsidiaries for securing advances from different FHLBanks, there can be
some bookkeeping and regulatory hurdles. Officials from one large thrift
holding company with whom we spoke said that there are balance sheet
management hurdles associated with the sale of assets from one subsidiary
to another. For example, the officials said that asset sales may involve
25 A Federal Reserve official stated that the Federal Reserve would
interpret safe and sound banking practices to include that sales of assets
between subsidiaries be conducted on market terms.
*de- pledging* assets pledged as collateral to secure advances at one
FHLBank and pledge them to another FHLBank. Subsidiaries meeting the
sister bank requirements must also ensure that the sale of assets meets
bank regulatory agency capital requirements. 26 In addition, each FHLBank
has established membership stock purchase requirements, which would
require a subsidiary that received assets from an affiliate to purchase
additional capital from the FHLBank. We note that the membership capital
requirements for each FHLBank can differ. We also note that it is
difficult to determine the extent to which holding companies transfer
assets between their subsidiaries and whether any such
transfers result in competition between the FHLBanks. Federal Reserve
officials said that they do not collect data on transfers of assets among
subsidiaries, although one Federal Reserve official said that such
transfers occur frequently. FHFB officials commented that it was not clear
that holding companies had financial incentives to move collateral from
one subsidiary to another to obtain favorable advance rates. The FHFB
officials said that if a subsidiary had sufficient cash to purchase
collateral from an affiliate, it already would have sufficient eligible
collateral to
secure advances from its local FHLBank and would not need additional
collateral. FHFB Has Not
FHFB is responsible for helping ensure that the FHLBanks follow statutory
Identified Significant
and regulatory requirements in making advances and that competitive
pressures within the FHLBank System do not compromise the System*s Advance
Term Pricing safety and soundness. Although the FHLBanks have adopted
differing
Deficiencies, but approaches to setting advance pricing terms, FHFB*s
examination program FHLBank Safety and
has not identified significant violations in the banks* practices over the
past several years. However, as part of its oversight efforts, FHFB
collects data Soundness Data on FHLBank collateral practices that have
questionable value in their
Reporting Can Be current format. In addition, FHFB does not collect data
necessary to fully
assess competition within the FHLBank System, such as data on the Improved
advance terms that holding company subsidiaries may receive from different
FHLBanks. Such data would also help FHFB assess the potential risks
associated with multidistrict membership. 26 Banking regulators, such as
FDIC, require insured depository institutions to meet leverage and risk-
based capital requirements.
FHFB Examinations Have FHFB carries out its oversight responsibilities
through, among other
Not Identified Serious means, annual examinations and off- site
monitoring. During the
Advance Term Pricing examination process, FHFB examiners review a range of
activities at each Deficiencies
FHLBank, such as its asset and liability management, collateral management
practices, and compliance with relevant laws and regulations. Off- site
monitoring is typically carried out by FHFB headquarters staff and
involves the review of financial data that provides information and
insights into the safety and soundness of the FHLBanks. Regular off- site
monitoring between annual examinations is important because the FHLBanks*
financial conditions and risks can change significantly in a short period.
Off- site monitoring can help target examination reviews towards emerging
risks at a particular FHLBank or across the System. In reviewing advance
pricing term compliance, FHFB examiners are responsible for determining
whether the FHLBanks price their advances
above the cost of issuing debt, the FHLBank*s member products policy
clearly outlines the standards and criteria for differential pricing, and
the FHLBanks apply these standards and criteria consistently and without
discrimination to all members. In reviewing collateral compliance, FHFB
examination teams look at the policies the FHLBanks use to conduct their
collateral verification site visits and the agreements they use to perfect
their liens. FHFB examiners also review the procedures that the FHLBanks
have established to ensure that they value their members* collateral
frequently so that it is in line with the haircuts that they apply. FHFB
did not identify significant problems in the FHLBanks* advance term
pricing practices in examinations completed in 2001 and 2002. FHFB
officials said that their examinations have generally concluded that the
FHLBanks comply with collateral requirements and setting advance interest
rates. FHFB examinations completed between 2001 and 2002 that we reviewed
identified no serious deficiencies. 27 According to FHFB examination
criteria, a *violation* represents a significant deficiency at a FHLBank
while a recommendation is less serious. With the exception of
one violation for failure to perform advance collateral verification, FHFB
examinations regarding collateral contained only recommendations that
FHLBanks develop or expand policies. Similarly, according to the FHFB
27 An FHFB official provided us with copies of all examination reports for
2001 and 2002 that noted any findings related to collateral management
practices.
officials, the agency has only recommended that certain FHLBanks describe
more clearly their policies on differential advance term pricing. FHFB*s
FHLBank System
Although FHFB has collected collateral data from the FHLBanks since 2000
Safety and Soundness Data that are intended to assist in monitoring the
FHLBanks* safety and
Reporting Procedures Have soundness, the data have questionable value in
their current format. On an Limitations
annual basis, FHFB has requested that the FHLBanks provide data on the
level of collateral securing advances. FHFB requests data on, among other
things, the total value of collateral securing advances, collateralization
by member type (such as commercial bank and thrifts), collateralization by
member size (such as members with $10 billion or more in assets), and the
use of eligible collateral by member institutions (such as the use of
singlefamily mortgages and small business and agricultural CFI
collateral). According to the FHFB*s 2003 request letter, these data are
*very valuable in exhibiting the System*s safety and soundness and the
extent to which traditional types of collateral secure advances.*
Additionally, FHFB stated
in the letter that the information would help FHFB ascertain the
acceptance and placement of small business and agricultural collateral by
CFIs.
Although FHFB has identified such data as useful for assessing the FHLBank
System*s safety and soundness, we found that FHLBanks do not have clear
information on how FHFB wants the data to be reported. Several FHLBanks
that we visited report specific collateral* such as
individual single- family mortgages or CFI loans* that has been pledged by
their members to support outstanding advances. Officials at these FHLBanks
said that they had provided the data in the format requested by FHFB. In
contrast, other FHLBank officials told us that they reported all of the
eligible collateral on the books of their members. A senior official from
one of these FHLBanks said that since the bank has access to all the
eligible collateral with whom it has blanket lien agreements, there was no
need to report more specific loan- level data to FHFB. Officials from one
FHLBank said that FHFB provided only general guidance on what collateral
data to report, which required each FHLBank to develop its own reporting
criteria.
Table 9 illustrates the differing approaches that the FHLBanks use to
report collateral data to FHFB. The table shows the total advances
outstanding, the reported collateral securing those advances, and the
ratio of collateral to advances at each FHLBank as of December 31, 2002.
The ratios at FHLBanks B and K show that their collateral to advance
ratios are 1. 23 to 1
and 1.26 to 1, respectively. These FHLBanks report to FHFB individual
collateral securing advances. In contrast, FHLB E*s ratio of 7.15 to 1 is
explained by the fact that the bank reports to FHLBank the value of all
the eligible collateral held by its members.
Tabl e 9: FHFB Data on Collateralization and Advances as of December 31,
2002
Dollars in millions
FHLBanks Total collateral Total advances Collateralization ratio
Bank A $62,497 $24,027 2.60 Bank B $30,297 $24,651 1.23 Bank C $81,210
$27,490 2.95 Bank D $158,553 $77,205 2.05 Bank E $196,007 $27,428 7.15
Bank F $77,510 $25,991 2.98 Bank G $152,840 $80,252 1.90 Bank H $62,294
$23,044 2.70 Bank I $117,248 $38,237 3.07 Bank J $113,604 $66,017 1.72
Bank K $46,010 $36,488 1.26 Bank L $55,041 $19,686 2.80 Source: FHFB.
Note: The A- L listing of the FHLBanks in this table differs from the A- L
listing in other tables in this report.
Because certain FHLBanks may report all of the eligible collateral held by
their members, the data that FHFB receives on the acceptance and placement
of CFI collateral* one of FHFB*s stated reasons for collecting the data---
is difficult to assess. As of December 31, 2002, the FHLBanks reported to
FHFB that there was $7.2 billon in small business and agricultural loans
securing advances by CFIs. Of that $7.2 billion figure, $3.6 billion* or
approximately 50 percent* was reported by one FHLBank, which reported the
value of all the collateral on its members* books. This FHLBank reported
the highest value of CFI collateral in the FHLBank System. However, an
official from this FHLBank said that a small number of its members secured
advances with CFI collateral and estimated that the total amount of such
advances was $25 million.
The Director of FHFB*s Office of Supervison said that the agency planned
to review its current collateral data collection and reporting procedures
for
the FHLBanks. The Director said that the collateral data are currently
used to complement FHFB*s safety and soundness supervision program and
that the data provided a broad overview of trends and anomalies. However,
the Director also said that the collateral data did not substitute for
FHFB*s annual examinations at each FHLBank, which we discussed earlier.
Although the FHLBank collateral data may provide some benefits for
FHFB*s examination program, FHFB*s decision to review current reporting
procedures appears to be appropriate. The current data do not allow for
meaningful comparisons across the FHLBank System and the reported data on
the placement of CFI collateral are potentially misleading. With better
collateral data, FHFB*s ability to monitor the FHLBank System*s safety and
soundness could be enhanced.
FHFB*s oversight of the FHLBank System could also be enhanced by reviewing
the extent to which competition may currently take place between FHLBanks
and its potential effects on the System*s safety and soundness. Available
evidence suggests that competition may take place between the FHLBanks,
including (1) key differences in advance term pricing across the FHLBank
System, (2) statements by some FHLBank officials that holding company
subsidiaries may play one FHLBank against another to obtain more favorable
advance rates, and (3) the legal authority of holding company subsidiaries
to transfer assets between one another thereby creating the potential that
collateral may be moved from one subsidiary to another to obtain more
favorable advance rates. Although
there is evidence that competition between the FHLBanks takes place, the
evidence is largely anecdotal and has not been quantified. Given FHFB*s
oversight responsibilities for the FHLBank System, it could benefit by
collecting data necessary to better understand the degree of competition
within the System. For example, FHFB could collect data on the advance
terms--- including interest rates--- that the subsidiaries of holding
companies obtain on advances and whether the eligible collateral at each
subsidiary has fluctuated over time. By collecting such data, FHFB could
identify the potential effects that holding company subsidiaries have on
competition between the FHLBanks and whether such competition in any way
has affected the FHLBanks* underwriting standards. Additionally, such data
could assist FHFB in assessing the potential competitive and safety and
soundness implications of multidistrict membership.
Conclusions Within the framework established by statute and regulation,
the FHLBanks have independent authority to set advance pricing terms that
meet their
business needs and the needs of their members. As a result, advance
pricing terms vary across the FHLBank System as evidenced by sometimes
differing interest rates, tiered- pricing programs, collateral
requirements, borrowing limits, and advance activity capital requirements.
Because many
holding companies have multiple subsidiaries, each of which may be
eligible for membership in a different FHLBank, they have the opportunity
to obtain advances from those FHLBanks that offer the most advantageous
terms. Under exemptions to Sections 23A and 23B of the Federal Reserve
Act, moreover, the potential also exists that holding companies can
transfer assets from one subsidiary to another to obtain favorable advance
pricing.
These conditions create the potential for competition on advance pricing
among the FHLBanks and any such pressures may be enhanced under
multidistrict membership.
FHFB has a critical responsibility in helping to ensure that the FHLBanks
sometimes differing advance pricing terms are conducted within statutory
and regulatory requirements. In particular, FHFB is responsible for
ensuring that the FHLBanks do not price advances below the cost of funds
and fully secure advances with eligible forms of collateral. Although FHFB
has not identified any serious violations in advance pricing terms in
recent years, the agency has an important responsibility to ensure that
any competitive pressures do not threaten the FHLBank System*s safety and
soundness. However, the data that FHFB currently collects on collateral
from the FHLBanks is of questionable value in their current format for
understanding the System*s safety and soundness. Moreover, FHFB does not
collect data that could be helpful in assessing the competitive
implications of holding companies whose subsidiaries operate in different
FHLBank districts as well as multidistrict membership.
Recommendations To strengthen FHFB*s safety and soundness oversight, we
recommend that FHFB review its current collateral reporting requirements
and work with
the FHLBanks to obtain data that are useful in understanding collateral
practices within the System. We also recommend that FHFB work with the
FHLBanks to obtain data necessary to understand the competitive and safety
and soundness implications of holding companies whose subsidiaries operate
in different FHLBank districts as well as multidistrict membership.
Agency Comments and We received written comments on a draft of this report
from FHFB and the
Our Evaluation Federal Home Loan Bank President*s Conference, which are
reprinted in
appendixes III and IV, respectively. We also received technical comments
from FHFB, several FHLBanks, and the Board of Governors of the Federal
Reserve, which have been incorporated into the report where appropriate.
FHFB agreed to implement the recommendations contained in the report. FHFB
stated that while the collateral data discussed in the report were used
during the examination process, the data did not substitute for annual
examinations. FHFB stated that it planned to examine the effectiveness of
the collateral policies and procedures at each FHLBank and to identify
practices, possibly to include enhanced data collection and reporting, to
further the use of the most effective collateral practices. FHFB also
stated
that it planned to work with the FHLBanks to assess the value of
additional data collection and reporting to monitor the competitive and
safety and soundness influences of holding company subsidiaries that
operate in multiple FHLBank districts. FHFB stated that its examinations
have found that advance term pricing differed among the FHLBanks for many
reasons, including the trade- offs between dividends and advance rates and
competitive pressures. FHFB stated that it would be worthwhile to examine
the extent to which competition* both between the FHLBanks and from the
capital markets* can be a healthy influence on the efficient operation of
the FHLBanks.
The FHLBank President*s Conference stated that the report correctly noted
that the advance pricing and collateral practices of the 12 FHLBanks
differ. The Conference stated that the FHLBank Act and FHFB regulations
establish a framework in which individual FHLBanks can establish policies
that meet the needs of their member institutions. The Conference also
stated that statutory and regulatory provisions that require advance
interest rates to be set above borrowing costs and advances to be secured
by eligible collateral ensure that the FHLBanks operate in a safe and
sound manner. The Conference also stated that its members were prepared to
work with FHFB to collect data necessary to understand the collateral
practices across the FHLBanks. As agreed with your offices, unless you
publicly announce the contents of this report earlier, we plan no further
distribution until 30 days from the report date. At that time, we will
send copies of this report to the Chairman of the Senate Committee on
Banking, Housing, and Urban Affairs; and the
Ranking Member of the Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises of the House Committee on Financial
Services. We will also send copies to FHFB, the FHLBank President*s
Conference, the FHLBanks, and the Board of Governors of the Federal
Reserve. We will also send copies to others upon request. In addition,
this report will be available at no charge on GAO*s Web site at http://
www. gao. gov. Please contact Mr. Wesley M. Phillips or me at (202) 512-
8678, or email (phillipsw@ gao. gov or shearw@ gao. gov) if you or
your staff have any questions concerning this report. GAO staff who made
major contributions to this report are listed in appendix V.
William B. Shear Director, Financial Markets and Community Investment
Appendi Appendi xes x I
Objectives, Scope, and Methodology As discussed with your staff, our
report objectives are to (1) describe the laws and regulations pertaining
to the terms that FHLBanks can offer on advances; (2) provide information
on whether key differences exist in current advance pricing and other
terms across the FHLBanks; (3) determine whether holding companies face
any legal or regulatory barriers in transferring assets among subsidiaries
who are members of different FHLBank districts; and (4) describe FHFB's
safety and soundness
oversight of the FHLBanks' advance pricing practices and review selected
data that FHFB collects to monitor the safety and soundness of the FHLBank
System. To meet objective (1), we reviewed the Federal Home Loan Bank Act
as amended. We also reviewed the FHFB regulations that govern or describe
the terms that FHLBanks can offer on advances. We interviewed FHFB and
FHLBank officials to obtain their views on the terms FHLBanks can offer on
advances.
To meet objective (2), we interviewed FHFB, the 12 FHLBank presidents,
credit staff from 7 of the 12 FHLBanks, and we sent a structured
questionnaire to each of the 12 FHLBanks and received responses from
each of the banks. Additionally, we reviewed the credit policies of each
of the 12 FHLBanks and reviewed data on advance interest rates for those
FHLBanks that post such data on their Web sites. We note that the data
posted on the FHLBank Web sites are subject to change and that the actual
rates members actually pay may differ due to advance term negotiations
between FHLBanks and their members. Two other FHLBanks separately provided
their advance rates for the dates that we used. With this information, we
compared advance pricing and other terms across the FHLBanks to identify
key differences. The scope of our work did not involve developing a
methodology to determine why individual FHLBanks charge the advance
interest rates or other advance pricing terms that they do. To meet
objective (3), we reviewed applicable laws and regulations
regarding the transfer of funds and assets among holding companies and
their subsidiaries, including the Federal Reserve Act, Federal Home Loan
Bank Act, Home Owners' Loan Act, FHFB regulations, and Federal Reserve
Board regulations. We also interviewed representatives from the Federal
Reserve Board, FHFB and a large holding company.
To meet objective (4), we interviewed FHFB officials, reviewed FHFB's
advance pricing examination guidelines, and reviewed selected
examination reports for 2001 and 2002 related to advance pricing and
collateral requirements. We did not evaluate the effectiveness of FHFB's
examination program. To assess FHFB's collateral data reporting process,
we reviewed FHFB's data request forms and the data provided by the
FHLBanks. We also interviewed officials at selected FHLBanks to determine
their approach to reporting the collateral and other data and we
interviewed FHFB officials on these issues.
We conducted our review from January to September 2003 in Washington, D.
C.; New York, New York; Topeka, Kansas; Dallas, Texas; Atlanta, Georgia;
and Pittsburgh, Pennsylvania, and Indianapolis, Indiana, in accordance
with generally accepted government auditing standards.
Advance Interest Rates Charged by Specific
Appendi x II
FHLBanks on Selected Dates Table 10: Comparison of Selected FHLBank
Interest Rates on Fixed Rate Advances (July 18, 2003) a Difference
in basis Term Bank A Bank B Bank C Bank D Bank E Bank F Bank G Bank H Bank
I Bank J Bank K Range
points
12 mo. 1.29 1.20 1.54 1.53 1.22 1.41 1.45 1.23 1.34 1.43 1.38 1.20- 1. 54
34 24 mo. 1.77 1.68 1.95 1.95 1.74 1.84 1.98 1.76 1.86 1.84 1.96 1.68- 1.
98 30 36 mo. 2.31 2.28 2.5 2.48 2.32 2.42 2.51 2.31 2.46 2.48 2.5 2.28- 2.
51 23 48 mo. 2.83 2.80 3.12 3.00 2.93 2.92 3.09 2.84 2.98 3.01 3.04 2.80-
3. 12 32 60 mo. 3.27 3.22 3.4 3.43 3.34 3.34 3.48 3.28 3.39 3.45 3.46
3.22- 3. 48 26 Source: Selected FHLBanks.
Note: The A- K listing of the FHLBanks for this table differs from the
alphabetic listings in other tables in this report. a The interest rates
shown are generally for regular fixed term and rate advances with no
discounting.
The FHLBanks also differ in their policies regarding payment frequency and
daycount accrual methods. No attempt is made here to harmonize the data to
a single payment frequency and daycount accrual standard.
Table 11: Comparison of Selected FHLBank Interest Rates on Fixed Rate
Advances (July 25, 2003) a Difference
in basis Term Bank A Bank B Bank C Bank D Bank E Bank F Bank G Bank H Bank
I Bank J Bank K Range
points
12 mo. 1.26 1.56 1.36 1.45 1.55 1.40 1.40 1.21 1.30 1.44 1.24 1.21- 1. 56
35 24 mo. 1.78 1.97 1.85 1.96 1.96 1.94 1.84 1.73 1.80 1.84 1.78 1.73 -1.
97 24 36 mo. 2.35 2.57 2.52 2.61 2.43 2.58 2.50 2.39 2.41 2.54 2.39 2.35-
2. 61 26 48 mo. 3.02 3.15 3.12 3.24 3.18 3.18 3.06 2.99 3.01 3.15 2.99
2.99- 3. 24 25 60 mo. 3.48 3.64 3.61 3.69 3.54 3.66 3.51 3.46 3.49 3.65
3.47 3.46- 3. 69 23 Source: Selected FHLBanks.
Note: The A- K listing of the FHLBanks for this table differs from the
alphabetic listings in other tables in this report. a The interest rates
shown are generally for regular fixed term and rate advances with no
discounting.
The FHLBanks also differ in their policies regarding payment frequency and
daycount accrual methods. No attempt is made here to harmonize the data to
a single payment frequency and daycount accrual standard.
Comments from the Federal Housing Finance
Appendi x III Board
Comments from the Federal Home Loan Bank
Appendi x IV Presidents* Conference
Appendi x V
GAO Acknowledgments and Staff Contacts GAO Contacts William B. Shear (202)
512- 8678 Wesley M. Phillips (202) 512- 5660 Acknowledgments In addition
to the individuals named above, Tanya Cruz, Crystal Daniels,
Rachel DeMarcus, M*Baye Diagne, Marc Molino, Andy Pauline, Mitchell B.
Rachlis, and Barbara Roesmann made key contributions to this report.
(250114)
a
GAO United States General Accounting Office
Federal statutes and regulations require that the FHLBanks set advance
interest rates above their borrowing costs and fully secure advances with
eligible forms of collateral, such as single- family mortgage loans.
However, within this framework, each of the 12 FHLBanks has independent
authority to set advance pricing terms, which can result in several
significant key differences among the banks. For example, due to differing
costs and business strategies, FHLBank advance interest rates may differ
and many FHLBanks charge lower interest rates based on advance size while
others do not. Moreover, FHLBanks may set differing collateral
requirements for their members. For example, one FHLBank allows its
members to borrow up to 60 percent of the value of single family mortgages
pledged as collateral to secure advances while another allows up to 85
percent.
Among the FHLBanks* differing approaches to setting advance pricing terms,
FHFB has not found that any practice results in significant violations of
statute or regulation. However FHFB also collects collateral data from the
FHLBanks that have questionable value in their current format for
monitoring the System*s safety and soundness. Because FHLBank officials do
not have clear information about how FHFB would like the data reported,
the FHLBanks use different reporting definitions and criteria, which
limits the data*s analytical usefulness. Moreover, FHFB has not collected
data necessary to assess the current extent of competition within the
FHLBank System and the implications of holding companies with subsidiaries
that operate in multiple FHLBank districts as well as multidistrict
membership.
Locations of Federal Home Loan Banks Source: FHFB.
Seattle San Francisco
District 11 Dallas District 9
Des Moines District 8
Topeka District 10 Atlanta District 4 Chicago
District 7 District 6 District 5 Indianapolis
Cincinnati Pittsburgh
District 3 New York
District 2 Boston District 1 District 12
The Federal Home Loan Bank System*s (FHLBank System) traditional approach
to providing community and housing finance through 12 regional FHLBanks
(see figure) faces continual challenges due to consolidation in the
financial services industry and the emergence of mortgage lenders with
nationwide operations. In addition, the Federal Housing
Finance Board (FHFB), the System*s financial regulator, is analyzing the
benefits and costs of potential changes to the System*s membership rules
that would make
it easier for financial institutions to join multiple FHLBank districts
(referred to as multidistrict membership). To provide information that
would be helpful in assessing the potential safety and soundness
implications of these developments, GAO was asked among other items to (1)
determine whether key differences exist in the terms* such as interest
rates and collateral requirements*
that FHLBanks make on loans, also known as advances, to member financial
institutions such as banks
and thrifts and (2) discuss FHFB*s oversight of the FHLBanks and safety
and soundness data reporting requirements.
GAO recommends that FHFB collect data necessary to monitor System safety
and soundness. In written comments, FHFB and the FHLBanks agreed with
GAO*s recommendations.
www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 973. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact William B. Shear at (202) 512- 8678 or ShearW@ gao.
gov. Highlights of GAO- 03- 973, a report to the
Ranking Minority Member, Senate Committee on Banking, Housing and Urban
Affairs and the Chairman, Subcommittee on Capital Markets, House Committee
on Financial Services September 2003
FEDERAL HOME LOAN BANK SYSTEM
Key Loan Pricing Terms Can Differ Significantly
Page i GAO- 03- 973 FHLBank Advance Terms
Contents
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Page 1 GAO- 03- 973 FHLBank Advance Terms United States General Accounting
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Appendix I
Appendix I Objectives, Scope, and Methodology
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Appendix II
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Appendix III
Appendix III Comments from the Federal Housing Finance Board Page 40 GAO-
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Appendix IV
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Appendix V
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