Amendment of Budgets Regulation

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,

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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