[Federal Register Volume 65, Number 2 (Tuesday, January 4, 2000)]
[Notices]
[Pages 339-340]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-36]
Federal Register / Vol. 64, No. 2 / Tuesday, January 4, 2000 /
Notices
[[Page 339]]
FEDERAL HOUSING FINANCE BOARD
[NO. 99-61A ]
RIN 3069-AA88
Proposed Changes to the Financial Management Policy of the
Federal Home Loan Bank System
AGENCY: Federal Housing Finance Board.
ACTION: Notice.
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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing
to amend its policy statement entitled ``Financial Management Policy of
the Federal Home Loan Bank System'' (FMP). The proposed amendments to
the FMP are being made in conjunction and conformance with proposed
regulatory changes to the Finance Board's regulations regarding the
Office of Finance (OF), described in detail in a Proposed Rule
published elsewhere in this issue of the Federal Register. The proposed
regulatory changes would reorganize the OF, a joint office of the
Federal Home Loan Banks (Bank or Banks), and broaden its duties,
functions and responsibilities in two key respects: (1) the OF would
perform consolidated obligation (CO) issuance functions, including
preparation of combined financial reports, for the Banks; and (2) the
OF would serve as a vehicle for the Banks to carry out joint activities
in a way that promotes operating efficiency and effectiveness in
achieving the mission of the Banks.
DATES: The Finance Board will accept comments on the proposed changes
to the FMP in writing on or before March 6, 2000.
ADDRESSES: Send comments to Elaine L. Baker, Secretary to the Board, by
electronic mail at bakere@fhfb.gov, or by regular mail at the Federal
Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 20006.
Comments will be available for public inspection at this address.
FOR FURTHER INFORMATION CONTACT: Joseph A. McKenzie, Deputy Chief
Economist, Office of Policy, Research and Analysis, 202/408-2845,
mckenziej@fhfb.gov; Charlotte A. Reid, Special Counsel, Office of
General Counsel, 202/408-2510, reidc@fhfb.gov; or Eric E. Berg, Senior
Attorney, Office of General Counsel, 202/408-2589, berge@fhfb.gov.
Staff also can be reached by regular mail at the Federal Housing
Finance Board, 1777 F Street, N.W., Washington, D.C. 20006.
SUPPLEMENTARY INFORMATION:
I. Background
The FMP evolved from a series of policies and guidelines initially
adopted by the former Federal Home Loan Bank Board (FHLBB), predecessor
agency to the Finance Board, in the 1970s and revised a number of times
thereafter. The Finance Board adopted the FMP in 1991, consolidating
into one document the previously separate policies on funds management,
hedging, and interest-rate swaps, and adding new guidelines on the
management of unsecured credit and interest-rate risks. See 62 FR 13146
(Mar. 19, 1997).
The FMP generally provides a framework within which the Banks may
implement their financial management strategies in a prudent and
responsible manner. Specifically, the FMP identifies the types of
investments the Banks may purchase pursuant to their statutory
investment authority and includes a series of guidelines relating to
the funding and hedging practices of the Banks and the management of
their credit, interest-rate, and liquidity risks. The FMP also
establishes liquidity requirements in addition to those required by
statute. See FMP secs. III-IV.
II. Analysis of the FMP amendments
Pursuant to section 11 of the Federal Home Loan Bank Act, 12 U.S.C.
1431, and the proposed changes to 12 CFR parts 900, 910 and 941
described in detail in a Proposed Rule published elsewhere in this
issue of the Federal Register, the Finance Board and the Banks have
authority to issue through the OF consolidated obligations (COs), i.e.,
bonds, notes, or debentures on which the Banks are jointly and
severally liable. Under the FMP, a Bank is authorized to participate in
the proceeds from COs, so long as entering into such transactions will
not cause the Bank's total COs and unsecured senior liabilities to
exceed 20 times its capital. See FMP sec. IV.C.
The FMP also authorizes a Bank to participate in certain types of
standard and non-standard debt issues. See id. Specifically, the FMP
requires a Bank participating in non-standard debt issues to enter into
a contemporaneous hedging arrangement that passes the interest-rate or
basis risk through to the hedge counterparty unless the Bank is able to
document that the debt will be used to fund mirror-image assets in an
amount equal to the debt, offset or reduce interest-rate or basis risk
in the Bank's portfolio, or otherwise assist the Bank in achieving its
interest-rate or basis risk management objectives. If a Bank
participates in debt denominated in a currency other than U.S. dollars,
it is required to hedge the currency exchange risk. See id. at sec.
IV.C.3.
The proposed FMP amendments would delete existing section IV,
``Funding Guidelines,'' and replace it with a new section IV titled
``Minimum Total Capital and Hedging Requirements.'' The new section
would read as follows:
Minimum Total Capital and Hedging Requirements.
A. Leverage limit. Each Bank shall have and maintain at all
times total capital in an amount equal to at least 4.76 percent of
the Bank's total assets. For purposes of this section, total capital
is the sum of a Bank's retained earnings and total paid-in capital
stock outstanding, less the Bank's unrealized net losses on
available-for-sale securities.
B. Prohibition on foreign currency or commodity positions. A
Bank shall not take a position in any commodity or foreign currency.
If a Bank participates in consolidated obligations denominated in a
currency other than U.S. dollars or linked to equity or commodity
prices, it must hedge the currency, equity, and commodity risks.
The proposed FMP amendments would eliminate the Funding Guidelines,
with one exception, as unnecessary in light of the proposed
comprehensive regulatory amendments published elsewhere in this issue
of the Federal Register. The one exception concerns the leverage limit.
Currently, Finance Board regulations (12 CFR 910.1(b)) and the FMP
provide that, on a Bank System-wide and Bank-by-Bank basis,
respectively, liabilities cannot exceed 20 times paid-in capital stock,
retained earnings, and reserves. As discussed in detail in the proposed
rulemaking, the Finance Board is proposing to remove the System-wide
liability-based leverage limit from Finance Board regulations as
unnecessary, and is here proposing to replace the current Bank-by-Bank
liability-based leverage limit in the FMP with a minimum total capital
requirement that would, in effect, recast the leverage limit as a
percentage of assets, that is, that a Bank's total assets cannot exceed
21 times its capital, or inversely, capital must be at least 4.76
percent of assets. The Bank System had an average capital-to-assets
ratio of 5.1 percent at September 30, 1999.
Neither the elimination of the Bank System-wide leverage limit from
the Finance Board regulations, nor the proposed revision to the Bank-
by-Bank leverage limit contained in the FMP, would have any practical
effect on the Bank System or its bondholders. The Finance Board, as the
regulator of the Banks, would continue to monitor each Bank for
compliance with the individual leverage limit included in
[[Page 340]]
the FMP. The current FMP prohibits a Bank from participating in COs if
such transactions would cause the Bank's liabilities to exceed 20 times
the Bank's total capital. The proposed revision to the FMP would
establish an equivalent leverage standard stated as a percentage of
assets that would require each Bank to maintain capital of at least
4.76 percent of its total assets. Imposition of the 4.76 percent
standard on each Bank will ensure that the Bank System itself stays
within the leverage limit, rendering retention of a Bank System-wide
leverage limit unnecessary. Further, the Finance Board notes that with
the recent passage of Title VI of the Gramm-Leach-Bliley Act, the
Federal Home Loan Bank System Modernization Act of 1999, Pub. L. 106-
102, 113 Stat. 1338 (Nov. 12, 1999), the Banks will be subject to
statutory leverage limits and risk-based capital requirements. When
implemented in regulations, the new risk-based capital regime will
provide an additional safeguard to the Bank System and its bondholders
by requiring Banks to hold capital in proportion to the risks they
assume.
The changes reflected in proposed section IV.B of the FMP do not
draw the distinction between standard and non-standard debt issues
contained in the current FMP. Instead, the changes require the Banks to
hedge some types of debt issues previously defined as non-standard. The
types of debt issues that must be hedged under the proposed amendments
to the FMP are those linked to equity or commodity prices or those
denominated in foreign currencies.
The Finance Board also is taking this opportunity to propose a
change in the FMP unrelated to the issuance of debt or the OF
reorganization. Section VII of the FMP contains guidelines for the
Banks on the management of interest-rate risk. The Finance Board uses
duration of equity as its primary measure of interest-rate risk. The
current FMP gives the Banks an option on how to calculate their
duration of equity. The option deals with the inclusion or exclusion of
the cash flows associated with the Bank's Affordable Housing Program
(AHP) and Resolution Funding Corporation (REFCorp) obligations. Since
1995, each Bank has to contribute a minimum of 10 percent of its annual
income (net of its REFCorp obligation) for the AHP, with a Bank System-
wide minimum of $100 million. See 12 U.S.C. 1430(j)(5)(C). In addition,
the Banks, in the aggregate, formerly were required annually to
contribute $300 million towards the Bank System's REFCorp obligation.
Id. 1441b(f)(2)(c) (superseded).
The Gramm-Leach-Bliley Act changed the REFCorp obligation for years
2000 and beyond from a fixed annual payment of $300 million to the
payment of 20 percent of the Banks' net earnings (net of AHP and
operating expenses), with the payment period extended or shortened as
necessary to ensure full payment of the present value of the
obligation. Since the AHP has not been a fixed dollar obligation since
1994 and the REFCorp obligation will no longer be a fixed dollar
amount, the Finance Board proposes to prohibit the Banks from managing
their assets and liabilities as if these items are fixed dollar
obligations. Instead, under the revised FMP, a Bank would treat these
obligations as typical variable expenses (like operating expenses) for
purposes of asset-liability management. Because the Banks' AHP and
REFCorp obligations are variable expenses, the Finance Board believes
that it would not be appropriate for the Banks to include AHP and
REFCorp-related cash flows in their duration of equity calculations.
The Finance Board originally proposed this change to the FMP in 1997.
See 62 FR 13146 (Mar. 19, 1997). The proposed language would read as
follows:
Each Bank is required to report its cash flows and calculate its
duration and market value of equity without projected cash flows
which represent the Bank's share of the System's REFCorp and AHP
obligations.
The Finance Board is expressly proposing this language again as even
more appropriate in light of the Gramm-Leach-Bliley Act change to the
REFCorp payment methodology.
The Finance Board will accept comments on the proposed FMP
amendments for the same 60-day comment period as the proposed
regulatory amendments to parts 900, 910, and 941.
By the Board of Directors of the Federal Housing Finance Board.
Dated: December 14, 1999.
Bruce A. Morrison,
Chairman.
[FR Doc. 00-36 Filed 1-3-00; 8:45 am]
BILLING CODE 6725-01-P
