[Federal Register Volume 61, Number 211 (Wednesday, October 30, 1996)]
[Rules and Regulations]
[Pages 55877-55881]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-27817]
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FEDERAL HOUSING FINANCE BOARD
12 CFR Part 934
[No. 96-71]
Amendment of Budgets Regulation
AGENCY: Federal Housing Finance Board.
ACTION: Final rule.
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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending
its regulation governing approval of Federal Home Loan Bank (FHLBank)
budgets by removing the requirement that the FHLBanks' budgets be
approved by the Finance Board. In order to ensure sufficient data to
carry out its
[[Page 55878]]
supervisory responsibility to ensure the safety and soundness of
FHLBank operations, the final rule establishes specific requirements
for the FHLBanks' preparation and reporting of both budget and other
financial information to the Finance Board. Certain of these reporting
requirements are derived and streamlined from the Finance Board's
current practice for budget and financial information reporting by the
FHLBanks. The final rule is consistent with the Finance Board's
continuing effort to devolve management and governance authority to the
FHLBanks. It also is consistent with the goals of the Regulatory
Reinvention Initiative of the National Performance Review.
EFFECTIVE DATE: The final rule is effective November 29, 1996.
FOR FURTHER INFORMATION CONTACT: John C. Waters, Office of Resource
Management, (202) 408-2860, or Sharon B. Like, Senior Attorney-Advisor,
Office of General Counsel, (202) 408-2930, Federal Housing Finance
Board, 1777 F Street, N.W., Washington, D.C. 20006.
SUPPLEMENTARY INFORMATION:
I. Statutory and Regulatory Background
The Federal Home Loan Bank Act (Bank Act), 12 U.S.C. 1421 to 1449,
does not provide explicitly for Finance Board approval of Bank budgets.
See id. section 1432(a). Such approval authority is derived from the
Finance Board's general powers and duties to supervise the FHLBanks
under sections 2A(a)(3) and 2B(a)(1) of the Bank Act, as well as the
Finance Board's authority to approve corporate powers granted to the
FHLBanks under section 12(a) of the Bank Act. See id. sections
1422a(a)(3), 1422b(a)(1), 1432(a).
Section 934.6 of the Finance Board's existing regulation provides:
As prescribed by the [Finance] Board or its designee, each Bank
shall prepare and submit to the Board for its approval a budget.
Each Bank will operate within such budget as approved or as it may
be amended by the Bank's board of directors within limits set by the
Board. Any amendment beyond such limits must be submitted to the
Board for approval. The Board's designee, may approve amendments
within limits set by the Board.
See 12 CFR 934.6.
The substance of Sec. 934.6 previously appeared at Sec. 524.6 of
the regulations of the Finance Board's predecessor, the Federal Home
Loan Bank Board (FHLBB). See 12 CFR 524.6 (1989). (redesignated). The
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA), Pub. L. 101-73, 103 Stat. 183 (Aug. 9, 1989), amended the
Bank Act by creating the Finance Board and transferring from the FHLBB
to the Finance Board the responsibility for the supervision and
regulation of the twelve FHLBanks. See 12 U.S.C. 1422a(a), 1422b(a)(1).
Section 524.6 subsequently was redesignated as Sec. 934.6 of the
Finance Board's regulations. See 54 FR 36757 (Sept. 5, 1989).
In approving the FHLBanks' budgets under current Sec. 934.6, the
Finance Board's practice, which is not codified in the regulation, has
been to request from each FHLBank a report on the FHLBank's annual
budgets approved by its board of directors, including the following
information: projected balance sheet; projected income statement
(including FHLBank board-approved operating expense budget and staffing
levels); FHLBank board-approved capital expenditures budget;
supplemental information as requested by the Finance Board; strategic/
business plan; organizational chart; FHLBank board-approved budget
resolution; and management discussion of the FHLBank's expected
financial performance and underlying assumptions and comparisons with
the financial performance from the prior year.
Pursuant to Sec. 934.6, the Finance Board approves each of the
FHLBanks' operating expense and capital expenditures budgets. The
Finance Board also approves amendments to FHLBank budgets that exceed
previously approved limits.
In addition, Finance Board practice has been to require each
FHLBank to submit quarterly reports that evaluate year-to-date actual
performance results relative to the budget projections as originally
approved or amended, and reforecasted financial projections for the
remainder of the year relative to the budget projections as originally
approved or amended. Each FHLBank also submits an annual report that
evaluates the actual performance results for the year relative to the
budget projections as originally approved or amended.
The Finance Board has been considering ways to transfer a variety
of governance responsibilities it exercises to the FHLBanks since the
completion of studies by the Congressional Budget Office, General
Accounting Office, Department of Treasury, Department of the Housing
and Urban Development, and Finance Board, which were required by the
Housing and Community Development Act of 1992, Pub. L. 102-550, 106
Stat. 3672 (Oct. 28, 1992). These studies recommended that the
governance and regulatory responsibilities for the FHLBanks be
separated, with the FHLBanks carrying out the management functions, and
the Finance Board exercising regulatory oversight over the FHLBanks.
The Finance Board already has taken actions to devolve other governance
functions to the FHLBanks, including its recently adopted final rule
transferring responsibility for all FHLBank membership approvals from
the Finance Board to the FHLBanks. See 61 FR 42531 (Aug. 16, 1996) (to
be codified at 12 CFR part 933).
Approval of the FHLBanks' budgets is a management responsibility
which the Finance Board believes is best administered by the FHLBanks'
respective boards of directors. Therefore, the Finance Board approved
for publication a proposed rule to amend the budgets regulation by
eliminating the requirement that the Finance Board approve FHLBank
budgets, while establishing reporting requirements for the FHLBanks in
order to ensure that the Finance Board has sufficient information to
carry out its supervisory responsibility. The notice of proposed
rulemaking was published in the Federal Register on August 9, 1996,
with a 30-day public comment period that closed on September 9, 1996.
See 61 FR 41535 (Aug. 9, 1996).
The Finance Board received a total of seven comment letters in
response to the notice of proposed rulemaking. The commenters included
five FHLBanks and two trade associations. All comment letters
addressing the issue supported the elimination of Finance Board
approval of FHLBank budgets. Generally, commenters viewed budget
approval as a management responsibility best administered by the Banks'
boards and the transfer of this responsibility as consistent with the
Finance Board's devolvement of corporate governance authority.
In addition, most commenters addressed one or both of the two
issues in the proposed rule for which comments were specifically
requested--Finance Board determination of a consistent interest rate
scenario to be incorporated in FHLBank budgets and adoption of an
efficiency standard in the rule. One commenter also presented views on
establishing a threshold for budget amendments submitted to the Finance
Board and on overall reporting requirements proposed by the Finance
Board. Specific comments are discussed in Section II of the
SUPPLEMENTARY INFORMATION.
II. Analysis of Public Comments and the Final Rule
The final rule sets forth responsibilities and requirements for
adoption of annual FHLBank budgets,
[[Page 55879]]
and reporting requirements for annual budgets, budget amendments, mid-
year reforecasted projections, and annual actual performance results.
The following is a section-by-section analysis of the final rule.
A. Adoption of Annual FHLBank Budgets--Sec. 934.6(a)
Section 934.6(a)(1) of the final rule provides that each FHLBank's
board of directors shall be responsible for the adoption of an annual
operating expense budget and a capital expenditures budget for the
FHLBank, and any subsequent amendments thereto, consistent with the
requirements of the Bank Act, Sec. 934.6, and other regulations and
policies of the Finance Board. Finance Board approval of FHLBank
operating expense and capital expenditures budgets will no longer be
required. However, eliminating the requirement that the Finance Board
approve FHLBank budgets will not preclude the Finance Board from
continuing to require the reporting of FHLBank budgets and other
financial information (as codified in this final rule), as part of its
regulatory oversight responsibility. Furthermore, adoption of this
final rule does not remove or modify the requirement in section 12(a)
of the Bank Act that a FHLBank obtain the prior approval of the Finance
Board before it may purchase or erect, or lease for a term of more than
10 years, a building to house the FHLBank. See id. section 1432(a);
Sec. 934.6(a)(2).
Six commenters supported the transfer of budget approval authority
to the FHLBank boards. Almost uniformly, the commenters agreed that
budget approval is a management function most appropriately
administered at the individual FHLBank level, and that the budget
proposal is consistent with Finance Board efforts to devolve management
responsibilities to the FHLBanks.
The notice of proposed rulemaking specifically solicited comments
on whether the final rule should include an efficiency standard to
which FHLBank budgets should conform and, if so, what that standard
should be. Four commenters strongly opposed the adoption of an
efficiency standard. Commenters stated that no uniform efficiency
measure could be set for the FHLBanks, given the diversity of their
operations and operating philosophies. Two commenters noted that
efficiency standards are already in place at the FHLBanks, where
efficiency goals are required by stockholders, since inefficiency
impacts net income and thus reduces dividend availability. Two FHLBanks
also commented that a regulatory efficiency standard is not necessary
because the Finance Board has sufficient supervisory authority to
intervene if safety and soundness issues arise. It also was suggested
that adopting such a standard would be inconsistent with the goal of
separating the Finance Board's regulatory and governance
responsibilities.
After considering the comments received, the Finance Board has
decided not to incorporate a specific efficiency standard into the
final rule. The Finance Board concurs that, considering the diversity
of the FHLBanks, their districts, and their members, it would be
difficult to establish a uniform efficiency standard that would
recognize these differences while fairly measuring individual FHLBank
efficiency. However, Sec. 934.6(a)(1) of the final rule provides
generally that, in adopting their budgets, the FHLBanks have a
responsibility to protect both their members and the public interest by
keeping their costs to an efficient and effective minimum.
Section 934.6(a)(3) of the final rule provides that the board of
directors of a FHLBank may not delegate the authority to approve the
annual budgets, or any subsequent amendments thereto, to FHLBank
officers or other FHLBank employees.
Section 934.6(a)(4) of the final rule allows each FHLBank to
determine the interest rate scenario it will use in preparing its
annual budgets. This is a change from the current practice under which
the Finance Board provides the interest rate scenario that the FHLBanks
must use in preparing their budgets. The notice of proposed rulemaking
specifically requested comments on whether an alternative approach for
determining interest rate scenarios for FHLBank budgets, such as
requiring the use of reported interest rates as of a fixed date
specified in the regulation, would be preferable to the current
approach. Six commenters addressed the issue. Comments focused on
whether or not the Finance Board should determine interest rate
scenarios for FHLBank budgets. One commenter supported Finance Board
determination of a uniform interest rate scenario, believing that
uniform interest rates for all FHLBanks would improve Finance Board
monitoring capabilities, and would recognize potential risks of the
FHLBank System's joint and several liability. Five FHLBanks opposed
Finance Board determination of a uniform interest rate scenario.
Commenters stated that interest rates set by the Finance Board
generally lag behind the market, and budget procedures did not provide
the Banks with enough flexibility to update their budgets based upon
their own interest rate assumptions. One commenter raised the
possibility that multiple budgets based on different interest rate
scenarios, one established by the Finance Board and one by the FHLBank
board, might need to be prepared. One commenter stated that involvement
of the Finance Board in determining interest rates is inappropriate
since it does not involve safety and soundness concerns.
After considering the comments received, the Finance Board has
decided to provide the FHLBanks with the flexibility to determine their
own interest rate scenarios when preparing annual budgets. The Finance
Board believes that providing each FHLBank with the flexibility to
update interest rates as it deems appropriate throughout the budget
preparation process will improve the meaningfulness of FHLBank budgets.
The Finance Board further believes that the benefits gained from this
added flexibility will more than compensate for the lack of a FHLBank
System-wide uniform interest rate scenario. Each FHLBank, however, will
be required to provide to the Finance Board its interest rate
assumptions. See Sec. 934.6(b)(6).
Section 934.6(a)(5) of the final rule provides that a FHLBank may
not exceed its total annual operating expense budget or its total
annual capital expenditures budget without prior approval by the
FHLBank's board of directors of an amendment to such budget.
B. Budget Reports--Sec. 934.6(b)
Section 934.6(b) of the final rule establishes specific FHLBank
reporting requirements, certain of which are codified and streamlined
from the Finance Board's current practice for FHLBank reporting.
Specifically, the FHLBanks are required to submit to the Finance
Board, by January 31 of each year, in accordance with reporting formats
and as further prescribed by the Finance Board, such FHLBank budgets
and other financial information as the Finance Board shall require,
including the following: (1) Balance sheet projections; (2) income
statement projections, including operating expense budget data and
staffing levels; (3) capital expenditures budget data; (4) management
discussion of expected financial performance; (5) strategic or business
plan; (6) interest rate assumptions; and (7) a copy of the FHLBank's
board of directors resolution adopting the FHLBank's annual
[[Page 55880]]
operating expense budget and capital expenditures budget.
One commenter recommended that the reporting requirements imposed
on the FHLBanks should be limited to submissions of annual approved
operating expenses and capital expenditures budgets. However, the
Finance Board believes that the comprehensive collection of information
on the Banks' financial plans provided for in the final rule, including
balance sheet and income statement projections, enables the Finance
Board to review FHLBank operating expenses and capital expenditures in
context, and provides relevant information necessary to enable the
Finance Board to carry out its supervisory oversight responsibilities
over the FHLBanks.
C. Report on Amendments to Total Annual Budgets--Sec. 934.6(c)
Section 934.6(c) of the final rule requires a FHLBank to submit
promptly to the Finance Board a copy of the FHLBank's board of
directors resolution adopting any amendment increasing a FHLBank's
total annual operating expense budget or total annual capital
expenditures budget above originally approved budget limits.
One commenter recommended that only amendments increasing the total
budget by 10 percent or more be required to be reported to the Finance
Board. However, the Finance Board believes that any amendment of a
Bank's total budget should be a rare occurrence which reflects a
significant change that should be reported to the Finance Board.
Accordingly, the commenter's recommendation is not adopted in the final
rule.
D. Mid-year Reforecasting Report--Sec. 934.6(d)
Rather than requiring the current quarterly reports from the
FHLBanks of reforecasted projections for the year relative to original
budget projections, Sec. 934.6(d) of the final rule requires each
FHLBank to submit a mid-year report containing a balance sheet and
income statement setting forth reforecasted projections for the year
relative to the budget projections as originally approved or amended,
including a management discussion explaining any significant changes.
E. Annual Actual Performance Results Report--Sec. 934.6(e)
Rather than requiring the current quarterly reports from the
FHLBanks, which analyze actual performance results for the period
relative to original budget projections, Sec. 934.6(e) of the final
rule requires each FHLBank to submit an annual report containing a
balance sheet and income statement setting forth actual performance
results for the year relative to the budget projections as originally
approved or amended, including a management discussion explaining any
significant changes.
III. Regulatory Flexibility Act
This final rule applies only to the FHLBanks, which do not come
within the meaning of ``small entities,'' as defined in the Regulatory
Flexibility Act (RFA), 5 U.S.C. 601, et seq., section 601(6).
Therefore, in accordance with the provisions of the RFA, the Board of
Directors of the Finance Board hereby certifies that this final rule
will not have a significant economic impact on a substantial number of
small entities. Id. section 605(b).
List of Subjects in 12 CFR Part 934
Federal home loan banks, Securities, Surety bonds.
Accordingly, the Board of Directors of the Finance Board hereby
amends part 934, subchapter B of chapter IX, title 12, of the Code of
Federal Regulations, as follows:
PART 934--OPERATIONS OF THE BANKS
1. The authority citation for part 934 is revised to read as
follows:
Authority: 12 U.S.C. 1422a, 1422b, 1432, 1442.
2. Section 934.6 is revised to read as follows:
Sec. 934.6 Budget preparation and reporting requirements.
(a) Adoption of annual Bank budgets. (1) Each Bank's board of
directors shall be responsible for the adoption of an annual operating
expense budget and a capital expenditures budget for the Bank, and any
subsequent amendments thereto, consistent with the requirements of the
Act, this section, other regulations and policies of the Board, and
with the Bank's responsibility to protect both its members and the
public interest by keeping its costs to an efficient and effective
minimum.
(2) Pursuant to the requirement of section 12(a) of the Act (12
U.S.C. 1432(a)), a Bank must obtain prior approval of the Board before
purchasing or erecting, or leasing for a term of more than 10 years, a
building to house the Bank.
(3) A Bank's board of directors may not delegate the authority to
approve the Bank's annual budgets, or any subsequent amendments
thereto, to Bank officers or other Bank employees.
(4) A Bank's annual budgets shall be prepared based upon an
interest rate scenario as determined by the Bank.
(5) A Bank may not exceed its total annual operating expense budget
or its total annual capital expenditures budget without prior approval
by the Bank's board of directors of an amendment to such budget.
(b) Budget reports. Each Bank shall submit to the Board, by January
31 of each year, in a format and as further prescribed by the Board,
such Bank budgets and other financial information as the Board shall
require, including the following:
(1) Balance sheet projections;
(2) Income statement projections, including operating expense
budget data and staffing levels;
(3) Capital expenditures budget data;
(4) Management discussion of expected financial performance;
(5) Strategic or business plan;
(6) Interest rate assumptions; and
(7) A copy of the FHLBank's board of directors resolution adopting
the FHLBank's annual operating expense budget and capital expenditures
budget.
(c) Report on amendments to total annual budgets. A Bank shall
submit promptly to the Board a copy of the Bank's board of directors
resolution adopting any amendment increasing a Bank's total annual
operating expense budget or total annual capital expenditures budget
above originally approved budget limits.
(d) Mid-year reforecasting report. Each Bank shall submit to the
Board, by July 31 of each year, in a format and as further prescribed
by the Board, a report containing a balance sheet and income statement
setting forth reforecasted projections for the year relative to the
budget projections for that year as originally approved or amended,
including a management discussion explaining any significant changes in
the reforecasted projections from the budget projections as originally
approved or amended.
(e) Annual actual performance results report. Each Bank shall
submit to the Board, by January 31 of each year, in a format and as
further prescribed by the Board, a report containing a balance sheet
and income statement setting forth the actual performance results for
the prior year relative to the budget projections for that year as
originally approved or amended, including a management discussion
explaining any significant changes in the actual performance results
from the budget projections as originally approved or amended.
[[Page 55881]]
Dated: October 9, 1996.
By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 96-27817 Filed 10-29-96; 8:45 am]
BILLING CODE 6725-01-U
