[Federal Register: September 21, 2006 (Volume 71, Number 183)]
[Notices]
[Page 55181-55201]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21se06-40]
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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: http://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 http://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]
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