[Federal Register Volume 64, Number 196 (Tuesday, October 12, 1999)]
[Rules and Regulations]
[Pages 55125-55131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26283]
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FEDERAL HOUSING FINANCE BOARD
12 CFR Part 910
[No. 99-51]
RIN 3069-AA78
Allocation of Joint and Several Liability on Consolidated
Obligations Among the Federal Home Loan Banks
AGENCY: Federal Housing Finance Board.
ACTION: Final rule.
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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending
its rule governing the issuance of consolidated obligations, i.e.,
bonds, notes or debentures (COs) by the Finance Board pursuant to
section 11 of the Federal Home Loan Bank Act (Act), 12 U.S.C. 1431, to
establish a framework for the orderly allocation of joint and several
liability for the COs among the Federal Home Loan Banks (Banks). The
final rule adds new provisions to the Finance Board's regulations and
is intended to protect holders of COs to the greatest extent
practicable by providing a framework to ensure the continued timely
payment of all principal and interest on COs in the unlikely event of
the projected or actual inability of a Bank to meet its debt service
payment obligations.
DATES: This final rule is effective on November 12, 1999.
FOR FURTHER INFORMATION CONTACT: Joseph A. McKenzie, Deputy Chief
Economist, Office of Policy, Research and Analysis, by telephone at
(202) 408-2845 or by electronic mail at mckenziej@fhfb.gov, or
Charlotte A. Reid, Special Counsel, Office of General Counsel, by
telephone at (202) 408-2510 or by electronic mail at reidc@fhfb.gov, or
by regular mail at the Federal Housing Finance Board, 1777 F Street,
N.W., Washington, DC 20006.
SUPPLEMENTARY INFORMATION:
I. The Proposed Rule
On February 11, 1999, the Finance Board published for comment a
proposed rule to amend its Consolidated Bonds and Debentures Regulation
(CO Regulation), 12 CFR part 910, to outline a framework for the
orderly allocation of joint and several liability among the Banks on
COs issued by the Finance Board pursuant to section 11 of the Act, 12
U.S.C. 1431. 64 FR 6819 (Feb. 11, 1999). The sixty-day public comment
period closed on April 12, 1999. The Finance Board received thirteen
comment letters: twelve from Banks and one from a member institution.
The commenters, noting the stability and financial strength of the Bank
System, generally supported the goal of the proposed rule, but
expressed nearly uniform objection to the certification and reporting
requirements and requested other changes.
The Act provides plenary authority to the Finance Board in
connection with the issuance of COs, for which the Banks are jointly
and severally liable. Section 11 of the Act authorizes the Finance
Board to issue rules and regulations governing the issuance of COs. See
12 U.S.C. 1431(a). Pursuant to the authority set forth in section 11(b)
and (c) of the Act, the Finance Board may issue consolidated Bank
debentures or bonds which ``shall be the joint and several obligations
of all the Federal Home Loan Banks, and shall be secured and be issued
upon such terms and conditions as the [Finance] Board may prescribe.''
See id. at 1431(b) and (c). Moreover, section 11(d) of the Act provides
that the Finance Board shall have full power to require the Banks to
``deposit additional collateral or to make substitutions of collateral
or to adjust equities between the Federal Home Loan Banks.'' Id. at
1431(d). The Act makes clear that COs are not the obligations of and
are not guaranteed by the United States. See id. at 1435. The Banks
collectively are the sole obligors on COs. Finance Board regulations
governing the issuance of COs are set forth in 12 CFR parts 910 and
941.
[[Page 55126]]
Section 910.0(b) defines ``consolidated bonds'' to mean ``bonds or
notes issued on behalf of all Federal Home Loan Banks.'' For purposes
of this preamble, the terms CO(s), consolidated obligation(s), and
consolidated bonds are used interchangeably. In the final rule, the
term consolidated bond(s) is adopted for consistency with the existing
definitions in Sec. 910.0.
The Banks finance their operations principally with the proceeds
from COs issued by the Finance Board on their behalf. As of July 31,
1999, there were approximately $444.8 billion in COs outstanding. In
the history of the Bank System, no Bank has ever been delinquent or
defaulted on a principal or interest payment on any CO issued by the
Finance Board or the Federal Home Loan Bank Board (FHLBB), its
predecessor agency.
Neither the Finance Board nor the FHLBB adopted regulations to
establish the manner in which the joint and several liability of the
Banks would operate in the event of impending default or delinquency on
a CO. The Bank System remains financially healthy and strong, and no
such default or delinquency is expected. The holders of COs benefit
from the statutory joint and several liability of the Banks set forth
in section 11 of the Act. Prudence dictates, however, that the Finance
Board clarify how the joint and several financial responsibility for
the COs would be allocated among the Banks if a Bank were to experience
a payment problem.
The final rule establishes a procedure to assure timely interest
and principal payments on all outstanding COs. The final rule will
provide that any Bank that participates in the proceeds of a CO
issuance, and that experiences or projects a payment problem, would be
required to apply its assets first toward the satisfaction of that
consolidated obligation. The final rule further specifies, as a
regulatory matter, that the Finance Board, pursuant to its authority to
ensure that the Banks operate in a safe and sound manner, remain
adequately capitalized and able to raise funds in the capital markets,
and to adjust the relative equities among the Banks in connection with
the issuance of COs, see 12 U.S.C. 1422a(a)(1), (3)(A), (3)(B)(iii) and
1431(d), has ultimate authority and discretion at any time to call on
any Bank to make any principal or interest payment on any CO. The
underlying purpose of the final rule is to emphasize the Finance
Board's intent that holders of COs not experience any interruption in
the flow of interest or principal payments.
II. Summary of Comments and Analysis of Changes Made in the Final
Rule.
A. Definitions--Sec. 910.0
1. Existing Definitions
The existing definitions in Part 910 are retained with only minor
revisions. For purposes of consistency with other regulations,
``Board'' has been redefined as ``Finance Board,'' a definition of
``Bank'' has been added, and the remaining definitions have been re-
designated accordingly. Additional definitions are addressed as
follows.
2. Participating Bank
The proposed rule would have amended Sec. 910.0 of the CO
regulation to add a new defined term: ``Participating Bank.'' The final
rule does not adopt that definition because it is not a necessary
component of the certification requirement as adopted in the final rule
and does not add to the requirement that each Bank must satisfy its
direct obligations.
3. Non-Performing Bank
The proposed rule added another defined term to Sec. 910.0: ``Non-
performing Bank.'' A majority of the commenters contended that the term
``Non-Performing Bank'' was too broad, had negative or pejorative
connotations, or could imply a default on the COs where none had
occurred. One commenter suggested the term should be changed to ``Non-
Compliant Bank'' to focus on the reporting and certification
requirements. The Finance Board agrees that a change in the terminology
is appropriate and has revised the term in the final rule to ``Non-
complying Bank.'' Also in response to comments, the Finance Board has
removed all references to ``net loss'' in the definition and in the
revisions to the reporting and certification requirements. See
discussion of Sec. 910.7(b), below. Furthermore, the definition was
revised to clarify that a Bank also may become a ``Non-complying Bank''
if it is required to file a notice pursuant to Sec. 910.7(b)(2).
4. Direct Obligation
The final rule defines ``direct obligation'' to mean a Bank's
obligation to repay principal and interest arising from its receipt of
all or a portion of the proceeds of an issuance of COs by the Finance
Board on behalf of one or more Banks. A direct obligation also includes
an obligation to pay CO principal or interest that has been assumed by
a Bank subsequent to the issuance of the consolidated bond, and any
obligation to make assistance payments to any other Bank, whether
pursuant to an agreement between two or more Banks or pursuant to a
Finance Board payment order. Additionally, consistent with
Sec. 910.7(e)(1), direct obligation also includes the obligation of an
assisted Bank to reimburse a Bank that pays the direct obligations of
the former Bank pursuant to an assistance agreement or by order of the
Finance Board. Thus, a direct obligation may arise: (1) as a result of
the receipt of proceeds from the issuance of a CO, or in a subsequent
assumption of a CO payment obligation; (2) by virtue of becoming
obligated to make assistance payments to another Bank, either pursuant
to a voluntary agreement between two or more Banks or pursuant to a
Finance Board payment order; or (3) pursuant to the obligation to
reimburse an assisting Bank for assistance payments made under an
assistance agreement or by order of the Finance Board, including
related costs and interest.
5. Other Definitional Requests
In response to several comments, references to consolidated
obligations have been changed throughout the final rule to reference
consolidated bonds in order to maintain consistency within part 910 and
to conform to existing definitions in Sec. 910.0.
Many commenters requested that certain definitions be added to the
rule. A majority of commenters requested that the rule define the term
``non-essential expenses'' to exclude normal operating expenses or
ordinary operational expenditures incurred in the regular course of
business such as salaries and benefits, office space and equipment
expenses. The Finance Board has adopted the recommendation by rewording
Sec. 910.7(c)(3) of the final rule to clarify that a Bank may continue
to pay normal operating expenses, including salaries, costs of office
space or equipment, or related expenses, but must refrain from
incurring any extraordinary expenses, thus obviating the need for
another defined term.
A number of commenters requested that the rule define, by
establishing a fixed standard, reasonable interest as it relates to
consolidated bond interest and principal payments made on behalf of a
non-complying Bank, so as to avoid unnecessary disputes between the
assisting and assisted Banks. The commenters who addressed the issue
suggested that the standard should be the Federal Funds rate plus an
amount, ranging from 50 to 300 basis points, sufficient to be punitive.
The Finance Board wishes to preserve for itself maximum discretion to
prescribe a reasonable interest rate based on the case presented.
Therefore, no definition
[[Page 55127]]
of reasonable interest rate is included in the final rule. Instead,
Sec. 910.7(d) of the final rule makes it clear that, on amounts paid by
one Bank to meet the principal and interest payment obligations of
another Bank, the interest rate on the reimbursement will be set by the
Finance Board in an order, or will be negotiated between the affected
Banks, in the case of an inter-Bank assistance agreement, subject to
the approval of the Finance Board.
B. Joint and Several Liability--Sec. 910.7
The proposed rule added a new Sec. 910.7 to the CO Regulation to
establish a framework for the orderly allocation of joint and several
liability on the COs among the Banks.
1. General Requirements--Sec. 910.7(a)
The proposed rule at Sec. 910.7(a) would have stated the joint and
several liability of the Banks and the duty of the Banks to give
priority to consolidated bond payments.
One commenter objected to the premise of proposed Sec. 910.7(a)(2),
that each Bank must ensure the CO payment obligations of all other
Banks, and suggested that the final rule provide that each Bank be
responsible only for its own payment obligations. Because the Finance
Board believes that the essence of joint and several liability is that
each Bank is ultimately liable for the repayment of any CO, no change
to this provision has been adopted in the final rule, other than the
addition of a new subsection (3), which states that the provisions
shall not restrict, limit, or otherwise diminish the joint and several
liability of all of the Banks on all of the consolidated bonds.
Several commenters questioned how other creditors of the Banks,
such as swap counterparties, would be affected by proposed
Sec. 910.7(a)(2), and noted that the proposed rule would appear to give
CO holders payment priority over other creditors of the Bank,
regardless of the legal priorities among those parties. The Finance
Board is not attempting to create regulatory creditor priorities that
would not already exist under law. Therefore, the final rule has been
revised to address this concern by eliminating reference to ``any other
creditor not entitled by law or contract to priority over or parity
with the holder of consolidated obligations.'' A provision was also
added in Sec. 910.7(g) to clarify that payments made by a Bank to
satisfy the direct obligations of another Bank shall be made for the
sole purpose of discharging the joint and several liability of the
Banks on the consolidated bonds, not for the benefit of other
creditors.
2. Certification and Reporting--Sec. 910.7(b)
Section 910.7(b) of the proposed rule would have required each Bank
President to certify for the upcoming quarter that the Bank will not
suffer a net loss, will remain in compliance with reserve and liquidity
requirements, as well as with the Finance Board's Financial Management
Policy (FMP), and will be capable of making full and timely payment of
all its direct obligations when due. The proposed rule also would have
required each Bank immediately to report to the Finance Board any
projected loss, debt service deficiency or liquidity/reserves
deficiency.
The comments expressed a number of objections to Sec. 910.7(b) as
proposed: (1) the impossibility of certification as to future events;
(2) misplaced reliance on net loss as an indicator of a Bank's ability
to meet its direct obligations; (3) the lack of a specific causal nexus
between potential non-compliance with liquidity requirements and a
Bank's ability to meet its direct obligations; and (4) each Bank should
be required only to certify that it will have the ability in the
upcoming quarter to meet its direct obligations.
a. Certification as to Future Events. The commenters stated that it
would be impossible to certify as to future events given the potential
variables that affect financial statements, and were concerned that
forward-looking certifications might subject a Bank to liability if
events played out other than as predicted. Commenters also objected to
the certification requirement on the basis that a certification, which
generally involves confirmation of known facts as of a certain date,
would be a factual impossibility because factors beyond the control of
a Bank could preclude the Bank from being able to state with certainty
three months in advance that no change in circumstances would occur.
One commenter suggested that the lack of certainty as to future
projections could be dealt with either by revising the required
representation to assert that ``the President has no knowledge of any
facts that would materially affect the accuracy of the certification,''
or requiring, based on information known to the Bank, reasonable
assurance that the Bank will remain in compliance and be capable of
fulfilling CO payments in the upcoming quarter.
Another commenter favored requiring that Bank management provide a
negative assurance stating that, as of the date of the quarterly
certification, Bank management has no actual knowledge of material
facts that through the next quarter could foreseeably prevent the Bank
from making full and timely payment of interest and principal on the
COs due and payable in the upcoming quarter. To improve on the
reporting requirement, the commenter urged that the Banks be allowed to
rely on the unqualified opinion provided annually by a Bank's
independent certified accountant and eliminate the management
certification.
Concerned commenters noted that if certifications are given and
subsequent unanticipated events adversely affect the accuracy of the
statements or the ability of a Bank to make full and timely direct
obligation payments when due, the result could be causes of action
against the Bank and the Finance Board for false certifications.
While the Finance Board does not believe that a negative assurance
or a reasonable assurance statement would accomplish the same goal as
the certification and reporting requirements, the Finance Board does
believe that many of the other concerns raised by the commenters have
merit. The final rule addresses these concerns by modifying the
certification requirement to reflect that the certification should be
based on known information, current facts and financial information,
which the Finance Board expects will follow reasonable investigation.
b. Net Loss. Many commenters objected to being required to certify
that a Bank would not sustain a net loss in the upcoming quarter on the
grounds that net loss is an inappropriate measure for determining
ability to meet CO payment obligations. Several Bank commenters called
for the term to be eliminated from the rule, or defined if the
certification and reporting requirements were to be retained in the
final rule. One commenter stated that net income and net loss are
accounting concepts that bear virtually no relation to cash flow, which
is the primary factor affecting a Bank's ability to make payments.
One commenter suggested that the rule should provide that prior to
allocating loss to all Banks, the Finance Board should look to the
other participating Banks for payment of principal and interest where
another participating Bank is unable to make the payments for which it
is responsible. Some of the Banks expressed a desire that the reporting
periods be specified in the rule.
Several commenters argued that the various periodic financial
condition reports already required to be filed by
[[Page 55128]]
the Banks with the Finance Board \1\ provide sufficient notice to the
Finance Board of any potential difficulty a Bank might experience in
meeting its debt obligations, and that the certification and reporting
requirements would be unnecessarily duplicative and burdensome.
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\1\ See, e.g., 12 CFR 934.7 (balance sheets and income statement
projects); 12 CFR 934.17 (support for dividend requests); 12 CFR
937.2 (information for Bank System quarterly and annual reports).
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The Finance Board agrees with many of the observations in the
comments, and has addressed commenters' objections by eliminating the
requirement that each Bank must certify that it will not sustain a net
loss in the upcoming quarter.
c. Lack of Causal Nexus Between Liquidity and Ability to Pay Direct
Obligations. Many comments focused on what factors actually affect a
Bank's ability to meet its obligations and noted that non-compliance
with liquidity requirements is not tantamount to an inability to make
such payments.
One commenter, calling the liquidity requirements outmoded, stated
that compliance with the liquidity requirements is not an accurate
reflection of the Bank's ability to meet its payment obligations. The
commenter said that factors that would more likely cause a negative
impact on a Bank's ability to service its debt would be an inability to
access the capital markets to replace maturing or called debt, and that
the certification requirement is inconsistent with real world balance
sheet management.
The Finance Board does not agree with the comment that compliance
with the statutory and regulatory liquidity requirements does not bear
any financial relationship to a Bank's ability to meet its direct
obligations and has adopted this requirement in the final rule without
change. The comment is premised on the assumption that the Banks can
raise funds in the capital markets at will. However, since the Banks at
times may face inhospitable conditions in the capital markets during
which they might be unable to raise large amounts of money in very
short time periods, the Finance Board believes it is advisable for the
Banks to maintain sufficient, highly liquid assets to meet member
demands. Because the Banks are required to maintain compliance with
statutory and regulatory liquidity requirements at all times, no
additional burden should be imposed by the requirement in the final
rule that a Bank certify to that compliance.
d. Certification Only to Direct Obligations. The commenters
requested that the proposed rule be clarified to require a Bank to
certify only that it will remain capable of making full and timely
payment of its share of all principal and interest payments on COs. The
Finance Board concurs in these comments and has clarified the final
rule to state that each Bank must certify that it will remain capable
of making full and timely payment of all of its current obligations,
including direct obligations. Direct obligations would also include the
obligation to reimburse an assisting Bank for the payment of the
assisted Bank's direct obligations, as provided for in Sec. 910.7(e)(1)
of the final rule.
e. The Reporting Requirement. The proposed rule called for each
Bank to report immediately to the Finance Board if: (1) the Bank was
unable to provide the required certification; (2) subsequent to
providing the certification, the Bank projected that it would incur a
net loss, fail to comply with liquidity requirements or would be unable
to satisfy its payment obligations on consolidated bonds; (3) the Bank
actually missed a consolidated bond payment, incurred a net loss or
failed to comply with liquidity requirements. The commenters offered
criticisms nearly identical to those for the certification requirement.
Additionally, some commenters recommended that the rule specify the
reporting period.
In response to the comments, the final rule eliminates the
requirement to file a report in favor of a notice requirement. Section
910.7(b)(2) of the final rule requires a Bank to submit immediate
written notice to the Finance Board if the Bank is or is expected to be
unable to provide the certification when due as required by
Sec. 910.7(b)(1), or, if at any time, a Bank projects that it will not
meet its liquidity requirements, direct obligations or other current
obligations. Notice is also required if the Bank actually fails to meet
its liquidity requirements or direct obligations. Such notice also is
required if a Bank is in negotiations to enter or enters into an
assistance agreement with another Bank for the payment of its direct
obligations or other current obligations. Similarly, if a Bank
experiences a temporary interruption in its payment operations due to
an external event, which is not necessarily related to the financial
condition of the Bank such as a natural disaster or power failure, the
Bank must notify the Finance Board. A notice required by
Sec. 910.7(b)(2) may be provided by a senior officer of the Bank having
knowledge of its financial condition and authorized by the Bank to sign
the notice.
Finally, Sec. 910.7(b)(3) of the proposed rule provided that the
Finance Board could require a Bank to file a report, accompanied by a
consolidated obligation payment plan, if the Finance Board had reason
to believe the Bank was about to default on an obligation or cease to
be compliance with the statutory or regulatory liquidity requirements.
This provision has not been adopted as part of the final rule because
the Finance Board believes it would be redundant in light of the
revisions to the certification, notice and payment plan provisions.
3. Consolidated Obligation Payment Plan--Sec. 910.7(c)
Proposed Sec. 910.7(c) would have required any Bank projecting or
experiencing an inability to service its current COs to submit a
consolidated obligation payment plan to the Finance Board and to
refrain from incurring non-essential operating expenses, declaring or
paying dividends, or redeeming any stock, until its CO payment plan is
approved by the Finance Board and its consolidated obligation payment
obligations were satisfied.
One commenter recommended that Sec. 910.7(c) be modified to require
only that the plan address the methods a Bank would undertake ``to make
full and timely payment of its share of all principal and interest
consolidated obligation payments in which the [Federal Home Loan] Bank
is a participating Bank.'' The final rule clarifies that a Bank must
file a consolidated bond payment plan outlining the methods to be used
to meet its current obligations, including direct obligations. The
comment that the payment of non-essential expenses should contain an
exception for ``ordinary operational expenditures incurred by a Bank in
its regular course of business,'' has also been adopted in
Sec. 910.7(c)(3) of the final rule.
One commenter proposed that the final rule should make provision
for the Finance Board to accept or request modifications on a
consolidated bond payment plan within a certain timeframe, and for
automatic approval of the payment plan if the Finance Board fails to
act by a date certain. Another commenter opposed the restrictions set
forth in proposed Sec. 910.7(c)(3) on payment of dividends or
redemption of stock as being draconian. The commenter argued that the
Finance Board should impose such sanctions only after it has reviewed
the specific situation. The final rule is designed to allow the Finance
Board to analyze any proffered payment plan independently and in the
circumstances presented. A
[[Page 55129]]
fixed timeframe for automatic approval would not further the purpose of
the rule which is to afford the Finance Board a rational regulatory
process for the necessary deliberation of all relevant factors.
Additionally, the restrictions as to payment of dividend or stock
redemption are intended to preserve assets that may be needed to ensure
that the Bank will be able to continue to operate and make full and
timely CO payments. For these reasons, this provision of the final rule
has been adopted as proposed.
Other commenters urged the Finance Board to build flexibility into
the rule to allow Banks to develop recovery plans or participate in
fully-secured inter-Bank loans that would provide for orderly recovery
short of liquidation, depending on the severity of the Bank's financial
condition. The Finance Board has adopted certain modifications to the
rule and believes that as revised the final rule provides sufficient
flexibility in how the consolidated bond payment plans would be
structured, and makes sufficient provision for payment assistance
agreements to be reached between Banks. Inter-Bank consolidated bond
payment assistance agreements are subject to Finance Board approval.
Under the final rule, a Bank must notify the Finance Board when it
commences negotiations for such an assistance agreement with one or
more other Banks, and may not implement an assistance agreement prior
to Finance Board approval. Thus, the final rule clearly affords
oversight authority to the Finance Board to evaluate any given
situation individually and determine what remedial steps are
appropriate or required.
The final rule requires a Bank to file a consolidated bond payment
plan for Finance Board approval if the Bank fails to provide the
certification required in paragraph (b)(1), is required to provide the
notice required in paragraph (b)(2), or if the Finance Board determines
that the Bank will cease to be in compliance with the liquidity
requirements or will be unable to meet its current obligations,
including its direct obligations. The final rule requires that the
consolidated bond payment plan specify the measures the Bank will
undertake to meet its current obligations, including its direct
obligations. The final rule permits a non-complying Bank to continue to
incur and pay normal operating expenses in the regular course of
business, but requires such a Bank to refrain from incurring any
extraordinary expenses, declaring or paying dividends or redeeming
capital stock until the Finance Board has approved the plan and the
Bank's direct obligations have been met.
The Finance Board would have authority under the final rule to take
into consideration any capital requirements mandated by statute or
regulation, and make provision for the Banks to redeem capital and pay
dividends in accordance with the applicable provisions of the Act. The
Finance Board may waive or amend the consolidated bond payment plan
requirements as necessary to accommodate future legislative changes to
the capital structure of the Bank System. A separate, specific
reservation of authority to do so is unnecessary.
4. Finance Board Payment Orders--Sec. 910.7(d)
Under proposed Sec. 910.7(d), in the remote event that a Bank would
be unable, due to actual or projected cash flow or balance sheet
deficiencies, to service its direct obligations, the Finance Board
could have ordered one or more other Banks to make such payments. The
non-complying Bank would have been liable to the assisting Banks for
reimbursement. The Finance Board would look to the assets of the non-
complying Bank for reimbursement of such payments.
Section 910.7(d)(1) of the final rule makes clear that the Board of
Directors of the Finance Board, in its discretion and notwithstanding
any other provision in the rule, may at any time order any Bank to make
any payment on any consolidated bond. The final rule in
Sec. 910.7(d)(2) establishes unequivocally that to the extent a Bank
makes an assistance payment, whether by agreement or by order of the
Board of Directors of the Finance Board, the assisting Bank is entitled
to reimbursement of the assistance, including costs and interest. The
rate of interest for the reimbursement for payments made to assist a
non-complying Bank in making its payment obligations will be set by the
Board. Additionally, the final rule clarifies that where an agreement
is reached between an assisting Bank and a non-complying Bank (or one
whose payment capabilities were temporarily impaired by payment system
disruptions outside the control of the Bank) the negotiated rate will
be subject to the approval of the Finance Board. As discussed
previously herein, the Finance Board disagrees with the recommendations
from commenters that the rate of interest on reimbursement payments
should be set in the regulation at the Federal Funds rate plus 50 to
300 basis points or at an amount high enough to reflect the serious
nature of a potential default and act as a deterrent. In the Finance
Board's view, the interest rate is a necessary business component to
compensate the assisting Bank for its expenses and assistance. The
Finance Board has chosen to reserve to itself the authority to set a
reasonable interest rate or to approve the terms, including an interest
rate, of negotiated assistance agreements.
5. Adjustment of Equities--Sec. 910.7(e)
Under proposed Sec. 910.7(e), the reallocation of the payment
obligations among the other Banks would have been based on the pro rata
participation of each Bank in all COs outstanding as of the most recent
month end for which the Finance Board has data. The reallocation (as
opposed to payments that may be ordered by the Finance Board) would
have occurred only after the non-complying Bank had applied all of its
assets to service all of its direct consolidated obligations.
Several commenters expressed concern that the requirement in
proposed Sec. 910.7(e)(1), that a defaulting Bank shall apply its
assets to fulfill its consolidated obligations payment obligations,
could require a Bank to sell assets classified as ``held to maturity''
under ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES,
Statement of Financial Accounting Standards No. 115 (Fin. Accounting
Standards Bd. 1993) and thereby require the Bank to mark-to-market its
entire portfolio and further worsen the Bank's financial position.
One commenter asked for clarification of whether all of a Bank's
assets would have to be applied to the payment of COs before such
assets could be used to pay expenses as provided in proposed
Secs. 910.7(a)(2) and (c). Another commenter suggested that the
solution to that interpretation would be to construe the phrase ``apply
its assets'' to mean that a Bank may be required to apply interest
earned on its assets, and any cash received upon maturity of assets to
payment of consolidated obligations, after payment of all necessary
expenses, then there should be minimal adverse ramifications to the
Banks.
The final rule clarifies that a non-complying Bank shall apply all
of its assets to pay its direct obligations, including amounts owed to
reimburse any Bank that has provided assistance in meeting the non-
complying Bank's direct obligations, whether under an assistance
agreement or by order of the Finance Board.
A Bank that provides assistance to another Bank whose operations
temporarily are impaired by a natural
[[Page 55130]]
disaster or power failure will have a similar right to reimbursement.
Finally, Sec. 910.7(e)(3) provides that where the Finance Board
determines that a Bank is a non-complying Bank, then the Finance Board
may allocate the non-complying Bank's outstanding direct obligation
liability among the remaining Banks on a pro rata basis in proportion
to each Bank's participation in all COs as of the end of the most
recent month for which the Finance Board has data. In Sec. 910.7(e)(1)
of the final rule, a non-complying Bank is presumed to have
insufficient assets to continue to operate as usual and make full and
timely CO payments. The finding of asset insufficiency in paragraph (e)
differs from the situation contemplated by Sec. 910.7(c)(3) of the
final rule. In the latter section, the final rule assumes that the non-
complying Bank will continue to operate as usual, albeit under the
terms of a payment plan approved by the Finance Board. A non-complying
Bank is thus expressly authorized to continue to incur and pay ordinary
operating expenses.
The final rule thus contemplates that the Finance Board will have
to intervene to ensure that a non-complying Bank's CO payments are
fully and timely made and that its assets are appropriately applied to
outstanding consolidated bond obligations and other obligations as
provided in the final rule. The Act specifically provides the authority
for the Finance Board to do so, see 12 U.S.C. 1431(d), and the final
rule provides a regulatory framework for the Finance Board to evaluate
the overall situation and implement a rational payment solution.
Section 910.7(f) of the final rule expressly reserves to the Finance
Board the authority to adjust the equities of the Banks in a manner
different from the manner scripted in Sec. 910.7(e) to ensure the
safety and soundness of one or more of the Banks.
Several commenters suggested that the final rule permit inter-Bank
loans to assist in meeting payment obligations, upon terms and
conditions negotiated between the Banks, which would obviate the need
for the Finance Board to order a Bank to cover the CO payments of
another Bank. Another commenter argued in favor of a system providing
for the resources of all co-participating Banks to be tapped before the
assets of a non-participating Bank are applied to cover the liability
of a Bank. The Finance Board believes this could create disincentives
for the Banks to enter into CO issuances as co-participants and has not
incorporated this comment into the final rule. In addition, the final
rule provides for inter-Bank loans and will require that the assisted
Bank file notice pursuant to Sec. 910.7(b) and thus trigger the
provisions for CO payment plans and Finance Board review.
6. Reservation of Rights--Sec. 910.7(f)
Under proposed Sec. 910.7(f), the Finance Board reserved its
authority to take supervisory, enforcement or other action against any
Bank pursuant to the Act to ensure that the Banks are operated in a
safe and sound manner. The final rule adopts this and expressly
preserves the Finance Board's authority to adjust the equities between
the Banks in any manner different from that set forth in this rule.
7. No Rights Created--Sec. 910.7(g)
Several commenters suggested that the proposed rule be revised
expressly to provide that the certification and reporting requirements
of the rule do not create any rights in any third party and that non-
compliance with the provisions of the rule would not constitute a
default under the COs. The Finance Board has adopted this suggestion by
including a new Sec. 910.7(g) in the final rule. The final rule
provides that nothing in the section shall be deemed to create any
rights in any third party, payments made by a Bank on the direct
obligations of another Bank are made solely to discharge the joint and
several obligation of the Banks on the consolidated bonds, and
complying with or failing to comply with the provisions of this section
shall not be deemed to be an event of default under any consolidated
bond.
III. Regulatory Flexibility Act
The final rule applies only to the Banks, which do not come within
the meaning of ``small entities,'' as defined in the Regulatory
Flexibility Act (RFA). See 5 U.S.C. 601(6). Therefore, in accordance
with section 605(b) of the RFA, 5 U.S.C. 605(b), the Finance Board
hereby certifies that this final rule will not have significant
economic impact on a substantial number of small entities.
IV. Paperwork Reduction Act
The final rule does not contain any collections of information
pursuant to the Paperwork Reduction Act of 1995. See 44 U.S.C. 350, et
seq. Consequently, the Finance Board has not submitted any information
to the Office of Management and Budget for review.
List of Subjects in 12 CFR Part 910
Consolidated bonds and debentures, Banks, Securities.
For the reasons stated in the preamble, the Finance Board amends 12
CFR part 910 as follows:
PART 910--CONSOLIDATED BONDS AND DEBENTURES
1. Revise the authority citation for part 910 to read as follows:
Authority: 12 U.S.C. 1422a, 1422b and 1431.
2. Amend Sec. 910.0 by:
A. Revising paragraph (a).
B. Redesignating paragraphs (b) through (d) as paragraphs (c)
through (e), respectively.
C. Adding a new paragraph (b).
D. Revising newly designated paragraph (c).
E. Adding paragraphs (f) and (g).
The additions and revisions read as follows:
Sec. 910.0 Definitions.
(a) Finance Board means the Federal Housing Finance Board.
(b) Bank means Federal Home Loan Bank.
(c) Consolidated bond means any bond or note issued on behalf of
one or more Banks by the Finance Board pursuant to section 11(c) of the
Federal Home Loan Bank Act, as amended (the Act) (12 U.S.C. 1431(c)).
* * * * *
(f) Direct Obligation means an obligation of a Bank to make any
principal or interest payment due on a consolidated bond, whether such
obligation arises from:
(1) The Bank's receipt of sale proceeds from the issuance of that
consolidated bond or the assumption of the obligation in a voluntary
transaction subsequent to the issuance of the bond;
(2) An obligation to make an assistance payment to any other Bank,
whether made pursuant to an agreement between one or more Banks or
pursuant to a Finance Board payment order; or
(3) An assistance payment reimbursement obligation.
(g) Non-complying Bank means any Bank that fails to certify,
pursuant to Sec. 910.7(b)(1) of this part, that it is able to pay all
of its current obligations, including direct obligations, in full when
due; that fails to make consolidated bond payments in full when due;
that is required to file a notice pursuant to Sec. 910.7(b)(2) or a
consolidated bond payment plan pursuant to Sec. 910.7(c); or that is
determined by the Finance Board to require assistance in meeting its
direct obligations on consolidated bonds.
3. Add Sec. 910.7 to read as follows:
Sec. 910.7 Joint and several liability
(a) In general. (1) Each and every Bank, individually and
collectively, has an obligation to make full and timely payment of all
principal and interest on consolidated bonds when due.
[[Page 55131]]
(2) Each and every Bank, individually and collectively, shall
ensure that the timely payment of principal and interest on all
consolidated bonds is given priority over, and is paid in full in
advance of, any payment to or redemption of shares from any
shareholder.
(3) The provisions of this section shall not limit, restrict or
otherwise diminish, in any manner, the joint and several liability of
all of the Banks on all of the consolidated bonds issued by the Finance
Board pursuant to section 11(c) of the Act.
(b) Certification and reporting. (1) Before the end of each
calendar quarter, and before declaring or paying any dividend for that
quarter, the President of each Bank shall certify in writing to the
Finance Board that, based on known current facts and financial
information, the Bank will remain in compliance with the liquidity
requirements set forth in section 11(g) of the Act (12 U.S.C. 1431(g)),
and the Finance Board's Financial Management Policy (as the same may be
amended, modified or replaced), and will remain capable of making full
and timely payment of all of its current obligations, including direct
obligations, coming due during the next quarter.
(2) A Bank shall immediately provide written notice to the Finance
Board if at any time:
(i) The Bank is unable to provide the certification required in
paragraph (b)(1) of this section;
(ii) The Bank projects at any time that it will fail to comply with
statutory or regulatory liquidity requirements, or will be unable to
timely and fully meet all of its current obligations, including direct
obligations, due during the quarter;
(iii) The Bank actually fails to comply with statutory or
regulatory liquidity requirements or to timely and fully meet all of
its current obligations, including direct obligations, due during the
quarter; or
(iv) The Bank negotiates to enter or enters into an agreement with
one or more other Banks to obtain financial assistance from such
Bank(s) to meet its current obligations, including direct obligations,
due during the quarter; the notice of which shall be accompanied by a
copy of the agreement, which shall be subject to the approval of the
Finance Board.
(c) Consolidated bond payment plans. (1) A Bank promptly shall file
a consolidated bond payment plan for Finance Board approval:
(i) If it becomes a non-complying Bank as a result of failing to
provide the certification required in paragraph (b)(1) of this section;
(ii) If it becomes a non-complying Bank as a result of being
required to provide the notice required pursuant to paragraph (b)(2) of
this section, except in the event that a failure to make a principal or
interest payment on a consolidated bond when due was caused solely by a
temporary interruption in the Bank's debt servicing operations
resulting from an external event such as a natural disaster or a power
failure; or
(iii) If the Finance Board determines that a Bank will cease to be
in compliance with the statutory or regulatory liquidity requirements,
or will lack the capacity to timely and fully meet all of its current
obligations, including direct obligations, due during the quarter.
(2) A consolidated bond payment plan shall specify the measures the
non-complying Bank will undertake to make full and timely payments of
all of its current obligations, including direct obligations, due
during the applicable quarter.
(3) A non-complying Bank may continue to incur and pay normal
operating expenses incurred in the regular course of business
(including salaries, benefits, or costs of office space, equipment and
related expenses), but shall not incur or pay any extraordinary
expenses, or declare, or pay dividends, or redeem any capital stock,
until such time as the Finance Board has approved the Bank's
consolidated bond payment plan or inter-Bank assistance agreement, or
ordered another remedy, and all of the non-complying Bank's direct
obligations have been paid.
(d) Finance Board Payment Orders; Obligation to Reimburse. (1) The
Board of Directors of the Finance Board, in its discretion and
notwithstanding any other provision in this section, may at any time
order any Bank to make any principal or interest payment due on any
consolidated obligation.
(2) To the extent that a Bank makes any payment on any consolidated
obligation on behalf of another Bank, the paying Bank shall be entitled
to reimbursement from the non-complying Bank, which shall have a
corresponding obligation to reimburse the Bank providing assistance, to
the extent of such payment and other associated costs (including
interest to be determined by the Finance Board).
(e) Adjustment of equities. (1) Any non-complying Bank shall apply
its assets to fulfill its direct obligations.
(2) If a Bank is required to meet, or otherwise meets, the direct
obligations of another Bank due to a temporary interruption in the
latter Bank's debt servicing operations (e.g., in the event of a
natural disaster or power failure), the assisting Bank shall have the
same right to reimbursement as set forth in paragraph (e)(1) of this
section.
(3) If the Finance Board determines that the assets of a non-
complying Bank are insufficient to satisfy all of its direct
obligations as set forth in paragraph (e)(1) of this section, then the
Finance Board may allocate the outstanding liability among the
remaining Banks on a pro rata basis in proportion to each Bank's
participation in all consolidated obligations outstanding as of the end
of the most recent month for which the Finance Board has data.
(f) Reservation of authority. Nothing in this section shall affect
the Finance Board's authority to adjust the equities between the Banks
in any manner different than the manner described in this section, or
to take such enforcement or other action against any Bank pursuant to
the Finance Board's authority under the Act or otherwise to supervise
the Banks and ensure that they are operated in a safe and sound manner.
(g) No rights created. (1) Nothing in this section shall create or
be deemed to create any rights in any third party.
(2) Payments made by a Bank toward the direct obligations of
another Bank are made for the sole purpose of discharging the joint and
several liability of the Banks on the consolidated bonds.
(3) Compliance, or the failure to comply, with any provision in
this section shall not be deemed a default under the terms and
conditions of the consolidated bonds.
Dated: October 4, 1999.
By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 99-26283 Filed 10-8-99; 8:45 am]
BILLING CODE 6725-01-P
