06-9984. Examination Rating System for the Federal Home Loan Banks and the Office of Finance

AGENCY:

Federal Housing Finance Board.

ACTION:

Notice.

SUMMARY:

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

DATES:

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

FOR FURTHER INFORMATION CONTACT:

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

SUPPLEMENTARY INFORMATION:

I. Background

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

II. The Federal Home Loan Bank Rating System

In 2005, the Office of Supervision began to provide an overall conclusion—Satisfactory, Fair, Marginal, or Unsatisfactory—as part of its Report of Examination. The Rating System, which is the next step in communicating exam results to the Banks, is a risk-focused system under which each Bank and the OF is assigned a composite rating from “1” to “4” based on an evaluation of various aspects of their operations. The composite rating of each Bank is based on an evaluation and rating of 5 key components: corporate governance, market risk, credit risk, operational risk, and financial condition and performance. The composite rating of the OF is based primarily on an evaluation of 2 components: corporate governance and operational risk. A “1” rating indicates the lowest degree of supervisory concern, while a “4” rating indicates the highest degree of supervisory concern. The composite rating is based on the ratings of the underlying components, which also are rated on a scale of “1” to “4.” The composite rating is not an arithmetic average of the component ratings. Instead, the relative importance of each component is determined case-by-case within the parameters established by the Rating System.

Under the Rating System, examiners take administration of a Bank's affordable housing and community investment activities into account in assigning component ratings for corporate governance and operational risk. Given the importance of affordable housing and community investment activities to the mission of the Bank System, the Office of Supervision may consider the need for a separate rating system or a separate ratings component to evaluate and rate the affordable housing and community investment programs of each Bank after gaining experience with the Rating System.

The Rating System is intended to serve 2 purposes. First, it is designed to reflect in a comprehensive, systematic, and consistent fashion the overall condition and performance of an institution, taking into consideration all significant financial, operational, and compliance factors addressed in the Finance Board's examination. Second, the Rating System is meant to further enhance communication and transparency between the Office of Supervision and each Bank and the OF regarding the results of the examination process.

The ratings for individual Banks and the OF will not be made public or released to other Banks, but will be supplied to the individual Banks and the OF on a confidential basis as part of the examination and supervisory process.

The Federal Home Loan Bank Rating System is attached as an Exhibit to this Notice.

Dated: December 28, 2006.

By the Federal Housing Finance Board.

John P. Kennedy,

General Counsel.