Examination Rating System for the Federal Home Loan Banks and the Office of Finance, 55181-55201 [06-7848]

Agencies

• Federal Housing Finance Board

[Federal Register Volume 71, Number 183 (Thursday, September 21, 2006)]
[Notices]
[Pages 55181-55201]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-7848]


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FEDERAL HOUSING FINANCE BOARD

[No. 2006-N-05]


Examination Rating System for the Federal Home Loan Banks and the 
Office of Finance

AGENCY: Federal Housing Finance Board.

ACTION: Notice with request for comments.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is 
requesting comments on a proposed examination rating system to be known 
as the Federal Home Loan Bank Rating System (Rating System).

DATES: The Finance Board will accept comments in writing on or before 
October 23, 2006.
    Comments: Submit comments to the Finance Board only once, using any 
one of the following methods:
    E-mail: comments@fhfb.gov.
    Fax: 202-408-2580.

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    Mail/Hand Delivery: Federal Housing Finance Board, 1625 Eye Street, 
NW., Washington, DC 20006, Attention: Public Comments.
    Federal eRulemaking Portal: https://www.regulations.gov. Follow the 
instructions for submitting comments. If you submit your comment to the 
Federal eRulemaking Portal, please also send it by e-mail to the 
Finance Board at comments@fhfb.gov to ensure timely receipt by the 
agency. Include the following information in the subject line of your 
submission: Federal Housing Finance Board. Notice: Examination Rating 
System for the Federal Home Loan Banks and the Office of Finance. 
Docket Number 2006-N-05.
    We will post all public comments we receive without change, 
including any personal information you provide, such as your name and 
address, on the Finance Board Web site at https://www.fhfb.gov/
Default.aspx?Page=93&Top=93.

FOR FURTHER INFORMATION CONTACT: Anthony Cornyn, Associate Director, 
Supervision and Examination, Office of Supervision, cornyna@fhfb.gov or 
202-408-2522, or Kari Walter, Associate Director, Supervisory and 
Regulatory Policy, Office of Supervision, walterk@fhfb.gov 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

    The Federal Home Loan Bank Act (12 U.S.C. 1421 et seq.) provides 
that the primary duty of the Finance Board is to ensure that the 
Federal Home Loan Banks (Banks) operate in a financially safe and sound 
manner. To the extent consistent with the safety and soundness charge, 
the other statutory duties of the Finance Board are to: (1) Supervise 
the Banks; (2) ensure that the Banks carry out their housing finance 
mission; and (3) ensure that the Banks remain adequately capitalized 
and able to raise funds in the capital markets. See 12 U.S.C. 
1422a(a)(3).
    The Banks are privately capitalized, government-sponsored 
enterprises that provide wholesale credit to members and housing 
associates for use in mortgage lending and related activities. The 
Banks have a statutory mandate to promote housing and community 
investment finance. See 12 U.S.C. 1430(g), (i), and (j); 1430b. The 
Banks provide long-term, flexible financing to more than 8,100 member 
financial institutions around the country.
    In addition to supervising the Banks, the Finance Board has 
regulatory authority and supervisory oversight responsibility for the 
Office of Finance (OF), which is a joint office of the Banks that 
issues consolidated obligations in the public capital markets on behalf 
of the Banks. See 12 U.S.C. 1422b(b)(2); 12 CFR part 985. The Banks 
fund themselves principally by issuing consolidated obligations, which 
are the joint and several obligations of all 12 Banks' and consist of 
bonds (original maturity of 1 year or longer) and discount notes 
(original maturity of less than 1 year). Although consolidated 
obligations are not guaranteed or insured by the federal government, 
the Banks' status as government sponsored enterprises enables them to 
raise funds at rates slightly above comparable obligations issued by 
the Department of the Treasury.
    To carry out its mission of ensuring that the Banks and the OF are 
safe and sound so the Banks can serve as a reliable source of liquidity 
and funding for the nation's housing finance and community investment 
needs, the Finance Board has one major program area: supervision of the 
Banks. See 12 U.S.C. 1440 (requiring the Finance Board to perform 
annual examinations of the Banks). Staff monitors the performance, 
condition, and risk profile of each Bank through on-site examinations 
and other supervisory activities. Examinations are the cornerstone of 
the Finance Board's safety and soundness supervisory program. In order 
to execute an effective risk-based supervisory program that promptly 
identifies and addresses current and emerging risks to the Banks, the 
Office of Supervision plans to implement the risk rating system 
discussed below for use beginning in calendar year 2007.

II. The Proposed Federal Home Loan Bank Rating System

    The Finance Board is requesting comments on a proposed examination 
rating system to be known as the Federal Home Loan Bank Rating System. 
The proposed Rating System is attached as an Exhibit to this Notice.
    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 proposed 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 would be assigned a composite 
rating based on an evaluation of various aspects of their operations. 
The composite rating of each Bank would be 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 would be based primarily on an evaluation of 
2 components: corporate governance and operational risk.
    Under the Rating System, we would 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 proposed 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 would not be made public or released to 
other Banks, but would be supplied to the individual Banks and the OF 
on a confidential basis as part of the examination and supervisory 
process.
    Under the Rating System, each of the 5 components would be assigned 
a numeric rating from ``1'' to ``4.'' A ``1'' rating indicates the 
lowest degree of supervisory concern, while a ``4'' rating indicates 
the highest degree of supervisory concern. The composite rating of each 
Bank and the OF also would be rated on a scale of ``1'' to ``4'' based 
on the ratings of the underlying components. The composite rating would 
be based on the component ratings but it would not be a simple 
arithmetic average of the component ratings. Instead, the relative 
importance of each component would be determined on a case-by-case 
basis within the parameters established by this rating framework. As 
proposed, an examiner would take a Bank's performance in administering 
its affordable housing and community investment activities into 
consideration in assigning a composite rating to the

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Bank. More specifically, a Bank's performance in administrating it 
affordable housing and community investment activities would be given 
special consideration in the corporate governance and operational risk 
components of the Rating System.
    The Rating System would become operative when issued by the Office 
of Supervision, which is anticipated to occur before year end 2006 for 
implementation in 2007.

III. Request for Comments

    The Finance Board requests comment on all aspects of the proposed 
Rating System. In addition, the Finance Board invites specific comments 
on the following questions:
    1. Does the proposed Rating System capture the essential components 
of an institution's performance and condition that are relevant to 
assigning a composite rating to a Bank and the OF? If not, what 
additional or different components should be considered?
    2. Do the factors to be considered under each of the 5 components 
(corporate governance, market risk, credit risk, operational risk, and 
financial condition and performance) address the factors that should be 
considered in assessing each of the components? If not, what additional 
or different factors should be considered?

    Dated: September 13, 2006.

    By the Federal Housing Finance Board.
John P. Kennedy,
General Counsel.
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[FR Doc. 06-7848 Filed 9-20-06; 8:45 am]
BILLING CODE 6725-01-C