Amendment of Budgets Regulation

FEDERAL HOUSING FINANCE BOARD

12 CFR Part 934

[No. 96-53]

Amendment of Budgets Regulation

AGENCY: Federal Housing Finance Board.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing

to amend 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 supervisory responsibility to ensure the safety

and soundness of FHLBank operations, the Finance Board is further

proposing to establish 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 proposed rule is in keeping with the Finance Board's

continuing effort to devolve corporate governance authority to the

FHLBanks. It also is consistent with the goals of the Regulatory

Reinvention Initiative of the National Performance Review.

DATES: Comments on this proposed rule must be received in writing on or

before September 9, 1996.

ADDRESSES: Send comments to Elaine L. Baker, Executive Secretary,

Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C.

20006. Comments will be available for public inspection at this

address.

FOR FURTHER INFORMATION CONTACT: John C. Waters or Christina T.

Muradian, Office of Policy, (202) 408-2860 or 408-2584, or Sharon B.

Like, Senior Attorney-Advisor, Office of General Counsel, (202) 408-

2930, Federal Housing Finance Board.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

Section 934.6 of the Finance Board's existing regulations 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. No. 101-73, 103 Stat. 183 (Aug. 9, 1989), amended the

Federal Home Loan Bank Act (Bank Act), 12 U.S.C. 1421 to 1449, 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 id. Secs. 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).

The Bank Act does not provide explicitly for Finance Board approval

of Bank budgets. See 12 U.S.C. 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.

Secs. 1422a(a)(3), 1422b(a)(1), 1432(a).

II. Analysis of the Proposed Rule

A. Current Practice and Basis For Proposed Amendment

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

budget 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.

The Finance Board reviews this information and, pursuant to

Sec. 934.6, approves each FHLBank's operating expense and capital

expenditures budget. Generally, budgets have been approved by the

Finance Board as submitted by the FHLBanks. The Finance Board also

reviews and approves, pursuant to Sec. 934.6, amendments to the

FHLBanks' budgets to 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 original approved budget

projections, and reforecasted financial projections for the remainder

of the year relative to the original approved budget projections. Each

FHLBank also submits an annual report that evaluates the actual

performance results for the year relative to the original approved

budget projections.

The Finance Board has been considering ways to transfer a variety

of

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governance responsibilities it exercises to the FHLBanks since the

completion of studies by the Congressional Budget Office, General

Accounting Office, Department of the Treasury, Department of Housing

and Urban Development, and Finance Board, which were required by the

Housing and Community Development Act of 1992, Pub. L. No. 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 some 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 Final Membership Rule, adopted

July 3, 1996, no. 96-43 (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. The Finance Board believes that Finance

Board approval of FHLBank budgets is unnecessary because incentives

exist at the FHLBank board level to encourage efficient FHLBank

operations: e.g., increased operating expenses reduce shareholder

dividends, and since FHLBank elected board members represent FHLBank

shareholders, they have an incentive to effectively manage operating

expenses. Moreover, over the past few years, FHLBank System operations

have become increasingly efficient, with the ratio of operating

expenses to total assets declining from 17 basis points in 1990 to 8

basis points in 1995.

In addition, the fact that the Finance Board generally has approved

the budgets as submitted by the FHLBanks indicates that Finance Board

approval of the budgets is unnecessary.

The Finance Board would continue to exercise its supervisory

responsibility to ensure that the FHLBanks are operating in a safe and

sound manner by requiring and reviewing FHLBank budget and other

financial information, and conducting on-site examinations of the

FHLBanks. As further discussed below, the reporting requirements in the

proposed rule would codify and streamline current reporting practice.

B. Section-by-Section Analysis of the Proposed Rule

1. Adoption of Annual FHLBank Budget--Sec. 934.6(a).

Under the proposed rule, Finance Board approval of FHLBank

operating expense and capital expenditures budgets no longer would be

required. Proposed Sec. 934.6(a)(1) provides that each FHLBank's board

of directors shall be responsible for the adoption of an annual

operating expense and capital expenditures budget for the FHLBank, and

any subsequent amendments thereto, consistent with the requirements of

the Bank Act, proposed Sec. 934.6, and other regulations and policies

of the Finance Board. Implicit in these requirements are the

requirements that the FHLBanks operate in a financially safe and sound

manner and carry out their housing finance mission to the extent

consistent with the former. See 12 U.S.C. 1422a(a)(3).

The extent to which a FHLBank is operating efficiently pursuant to

its approved budget limits may impact on its safety and soundness and

ability to carry out its housing finance mission. The proposed rule

does not establish a specific ``efficiency'' standard as part of the

overall safety and soundness and housing finance mission requirements.

The Finance Board specifically requests comments on whether such a

standard should be included in the rule, and if so, what that standard

should be.

Proposed Sec. 934.6(a)(2) provides that the board of directors of a

FHLBank may not delegate the authority to approve the annual budget, or

any subsequent amendments thereto, to FHLBank officers or other FHLBank

employees.

Proposed Sec. 934.6(a)(3) requires that each FHLBank's annual

budget be prepared based upon an interest rate scenario provided by the

Finance Board. This is consistent with current Finance Board practice.

The Finance Board specifically requests comments on whether an

alternative approach, 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.

Proposed Sec. 934.6(a)(4) provides that a FHLBank may not exceed

its annual budget limits without prior approval by the FHLBank's board

of directors of an amendment to such budget.

2. Annual Budget Report--Sec. 934.6(b)

Proposed Sec. 934.6(b) 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 would be 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, a report

containing such FHLBank budget and other financial information as the

Finance Board shall require, which may include 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, and (6) a copy

of the FHLBank's board of directors resolution adopting the FHLBank's

annual operating expense and capital expenditures budget.

3. Report on Amendments to Annual Budget--Sec. 934.6(c)

Proposed Sec. 934.6(c) requires a FHLBank to submit promptly to the

Finance Board a copy of the FHLBank's board of directors resolution

adopting any amendment to the FHLBank's annual budget.

4. 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, proposed Sec. 934.6(d) requires each FHLBank to

submit only a mid-year report containing a balance sheet and income

statement setting forth reforecasted projections for the year relative

to the original budget for that year, including a management discussion

explaining any significant changes from the original budget.

5. 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, proposed Sec. 934.6(e)

requires each FHLBank to submit only an annual report containing a

balance sheet and income statement setting forth actual performance

results for the year relative to the original budget for that year,

including a management discussion explaining any significant changes

from the original budget.

III. Regulatory Flexibility Act

This proposed rule applies only to the FHLBanks, which do not come

within the meaning of ``small entities,'' as defined in the Regulatory

Flexibility Act. See 5 U.S.C. 601(6). Therefore, in

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accordance with 5 U.S.C. 605(b), the Finance Board hereby certifies

that this proposed rule, if promulgated as a final rule, will not have

a significant economic impact on a substantial number of small

entities.

List of Subjects in 12 CFR Part 934

Federal home loan banks, Securities, Surety bonds.

Accordingly, the Federal Housing Finance Board hereby proposes to

amend title 12, chapter IX, subchapter B, part 934, 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, 1442.

2. Section 934.6 is revised to read as follows:

Sec. 934.6 Budget preparation and reporting requirements.

(a) Adoption of annual Bank budget. (1) Each Bank's board of

directors shall be responsible for the adoption of an annual operating

expense and capital expenditures budget for the Bank, and any

subsequent amendments thereto, consistent with the requirements of the

Act, this section, and other regulations and policies of the Board.

(2) A Bank's board of directors may not delegate the authority to

approve the Bank's annual budget, or any subsequent amendments thereto,

to Bank officers or other Bank employees.

(3) A Bank's annual budget shall be prepared based upon an interest

rate scenario provided by the Board.

(4) A Bank may not exceed its annual budget limits without prior

approval by the Bank's board of directors of an amendment to such

budget.

(b) Annual budget report. Each Bank shall submit to the Board, by

January 31 of each year, in accordance with reporting formats and as

further prescribed by the Board, a report containing such Bank budget

and other financial information as the Board shall require, which may

include 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; and

(6) A copy of the FHLBank's board of directors resolution adopting

the FHLBank's annual operating expense and capital expenditures budget.

(c) Report on amendments to annual budget. A Bank shall submit

promptly to the Board a copy of the Bank's board of directors

resolution adopting any amendment to the Bank's annual budget.

(d) Mid-year reforecasting report. Each Bank shall submit to the

Board, by July 31 of each year, in accordance with reporting formats

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 original budget for that year, including a

management discussion explaining any significant changes in the

reforecasted projections from the original budget.

(e) Annual actual performance results report. Each Bank shall

submit to the Board, by January 31 of each year, in accordance with

reporting formats 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 original

budget for that year, including a management discussion explaining any

significant changes in the actual performance results from the original

budget.

Dated: July 25, 1996.

By the Board of Directors of the Federal Housing Finance Board.

Bruce A. Morrison,

Chairman.

[FR Doc. 96-20212 Filed 8-8-96; 8:45 am]

BILLING CODE 6725-01-P