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entitled 'Federal Home Loan Bank System: Key Loan Pricing Terms Can 
Differ Significantly' which was released on September 09, 2003.

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Report to Congressional Requesters:

September 2003:

Federal Home Loan Bank System:

Key Loan Pricing Terms Can Differ Significantly:

GAO-03-973:

GAO Highlights:

Highlights of GAO-03-973, a report to the Ranking Minority Member, 
Senate Committee on Banking, Housing and Urban Affairs and the 
Chairman, Subcommittee on Capital Markets, House Committee on 
Financial Services 

Why GAO Did This Study:

The Federal Home Loan Bank System’s (FHLBank System) traditional 
approach to providing community and housing finance through 12 
regional FHLBanks (see figure) faces continual challenges due to 
consolidation in the financial services industry and the emergence of 
mortgage lenders with nationwide operations. 

In addition, the Federal Housing Finance Board (FHFB), the System’s 
financial regulator, is analyzing the benefits and costs of potential 
changes to the System’s membership rules that would make it easier for 
financial institutions to join multiple FHLBank districts (referred to 
as multidistrict membership). To provide information that would be 
helpful in assessing the potential safety and soundness implications 
of these developments, GAO was asked among other items to (1) 
determine whether key differences exist in the terms—such as interest 
rates and collateral requirements—that FHLBanks make on loans, also 
known as advances, to member financial institutions such as banks and 
thrifts and (2) discuss FHFB’s oversight of the FHLBanks and safety 
and soundness data reporting requirements.

What GAO Found:

Federal statutes and regulations require that the FHLBanks set advance 
interest rates above their borrowing costs and fully secure advances 
with eligible forms of collateral, such as single-family mortgage 
loans. However, within this framework, each of the 12 FHLBanks has 
independent authority to set advance pricing terms, which can result 
in several significant key differences among the banks. For example, 
due to differing costs and business strategies, FHLBank advance 
interest rates may differ and many FHLBanks charge lower interest 
rates based on advance size while others do not. Moreover, FHLBanks 
may set differing collateral requirements for their members. For 
example, one FHLBank allows its members to borrow up to 60 percent of 
the value of single family mortgages pledged as collateral to secure 
advances while another allows up to 85 percent.  

Among the FHLBanks’ differing approaches to setting advance pricing 
terms, FHFB has not found that any practice results in significant 
violations of statute or regulation. However FHFB also collects 
collateral data from the FHLBanks that have questionable value in 
their current format for monitoring the System’s safety and soundness. 
Because FHLBank officials do not have clear information about how FHFB 
would like the data reported, the FHLBanks use different reporting 
definitions and criteria, which limits the data’s analytical 
usefulness. Moreover, FHFB has not collected data necessary to assess 
the current extent of competition within the FHLBank System and the 
implications of holding companies with subsidiaries that operate in 
multiple FHLBank districts as well as multidistrict membership. 

What GAO Recommends:

GAO recommends that FHFB collect data necessary to monitor System 
safety and soundness. In written comments, FHFB and the FHLBanks 
agreed with GAO’s recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-03-973.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact William B. Shear at 
(202) 512-8678 or ShearW@gao.gov.

[End of section]

Contents:

Letter: 

Results in Brief:  

Background:  

Statutes and Regulations Establish the General Pricing and Other Terms 
Each FHLBank Can Offer on Advances to Member Institutions:  

Significant Differences Exist in Key Advance Pricing Terms among the 
FHLBanks:  

Holding Companies Can Generally Transfer Funds and Assets among Their 
Insured Subsidiaries:  

FHFB Has Not Identified Significant Advance Term Pricing Deficiencies, 
but FHLBank Safety and Soundness Data Reporting Can Be Improved:  

Conclusions:  

Recommendations:  

Agency Comments and Our Evaluation:  

Appendixes:

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Advance Interest Rates Charged by Specific FHLBanks on 
Selected Dates: 

Appendix III: Comments from the Federal Housing Finance Board: 

Appendix IV: Comments from the Federal Home Loan Bank Presidents' 
Conference: 

Appendix V: GAO Acknowledgments and Staff Contacts: 

GAO Contacts:  

Acknowledgments:  

Tables: 

Table 1: FHLBank System Assets, as of June 30, 2003: 

Table 2: Types of Eligible Collateral in the FHLBank System: 

Table 3: FHLBanks' Average Annual Dividend Rates, 1997-2002:  

Table 4: Comparison of Selected FHLBank Interest Rates on Fixed Rate 
Advances (June 10, 2003): 

Table 5: Tiered Advance Pricing Programs at the FHLBanks: 

Table 6: FHLBank Haircuts for Single-Family Mortgage Collateral under 
the Blanket Lien Option: 

Table 7: FHLBank System Borrowing Capacity Limits:  

Table 8: FHLBanks' Advances Activity Based Stock Purchase Requirements: 

Table 9: FHFB Data on Collateralization and Advances as of December 31, 
2002: 

Table 10: Comparison of Selected FHLBank Interest Rates on Fixed Rate 
Advances (July 18, 2003): 

Table 11: Comparison of Selected FHLBank Interest Rates on Fixed Rate 
Advances (July 25, 2003): 

Figure: 

Figure 1: Location of the 12 Federal Home Loan Banks: 

Abbreviations:

CFI: Community Financial Institution:

FDIC: Federal Deposit Insurance Corporation:

FHLBank Act: Federal Home Loan Bank Act:

FHLBanks: Federal Home Loan Banks:

FHLBank System: Federal Home Loan Bank System:

FHFB: Federal Housing Finance Board:

GLBA: Gramm-Leach-Bliley Act:

ORERC: Other Real Estate Related Collateral:

MPF: Mortgage Partnership Finance:

MPP: Mortgage Purchase Program:

WAMU: Washington Mutual:

Letter September 8, 2003:

The Honorable Paul S. Sarbanes 
Ranking Minority Member 
Committee on Banking, Housing, and Urban Affairs 
United State Senate:

The Honorable Richard H. Baker 
Chairman, Subcommittee on Capital Markets, Insurance, and Government 
Sponsored Enterprises 
Committee on Financial Services 
House of Representatives:


The Federal Home Loan Bank System's (FHLBank System) traditional 
cooperative approach to providing housing and community finance through 
12 regionally based Federal Home Loan Banks (FHLBank) faces continual 
challenges due to consolidation in the financial services industry and 
the emergence of mortgage lenders with nationwide operations. 
Traditionally, each FHLBank made loans, known as advances, that were 
secured by eligible collateral (e.g., single family mortgage loans) to 
member institutions--particularly thrifts--located in its district to 
support housing finance. However, many large bank and thrift holding 
companies now own subsidiaries located in various FHLBank districts. 
Each eligible subsidiary may join the FHLBank in which district its 
headquarters is located, and may obtain advances from that 
FHLBank.[Footnote 1] Thus, these bank and thrift holding companies may, 
in effect, have access (through their subsidiaries) to advances from 
multiple FHLBanks.

Some observers have expressed concerns that these holding companies can 
pressure the FHLBanks to compete with one another on advance pricing 
terms--such as interest rates and collateral requirements--and that 
this competition could impair the overall safety and soundness of the 
FHLBanks, which were jointly and severally liable for $710 billion in 
debt obligations as of June, 2003.[Footnote 2] For example, the concern 
exists that a holding company could shift assets at a subsidiary 
located in one FHLBank district to pledge as collateral at a subsidiary 
in another district offering more favorable advance terms. Recently, 
these concerns have been heightened as the Federal Housing Finance 
Board (FHFB), the FHLBank System's financial regulator, has analyzed 
the benefits and costs associated with potential changes to the 
System's membership requirements that would allow financial 
organizations to join more than one FHLBank district (these potential 
changes to the System's membership rules are commonly referred to as 
multidistrict membership).[Footnote 3] Supporters of multidistrict 
membership believe that it is necessary to modernize the FHLBank 
System's structure, while critics believe that multidistrict membership 
would increase the potential for dangerous competition between the 
FHLBanks.

As discussed with your staff, this report provides an overview of 
advance term pricing requirements and practices within the FHLBank 
System that could be useful in assessing the extent of current 
competition among the FHLBanks and the potential competitive impacts of 
multidistrict membership. Specifically, you asked that we:

1. describe the laws and regulations pertaining to the terms that 
FHLBanks can offer on advances;

2. provide information on whether key differences exist in current 
advance pricing and other terms across the FHLBanks;

3. determine whether holding companies face any legal or regulatory 
barriers in transferring assets among subsidiaries who are members of 
different FHLBank districts; and:

4. describe FHFB's safety and soundness oversight of the FHLBanks' 
advance pricing practices and review selected data that FHFB collects 
to monitor safety and soundness practices within the FHLBank System.

To address these objectives, we obtained and reviewed applicable 
federal laws and regulations pertaining to the terms that the FHLBanks 
can offer on advances. We also interviewed the 12 FHLBank presidents, 
credit and collateral staff from 7 of the 12 FHLBanks, and FHFB 
officials. We sent a set of structured questions to each of the 12 
banks and reviewed their credit and collateral policies. In addition, 
we obtained and reviewed applicable laws and regulations regarding the 
transfer of funds and assets among holding companies and their 
subsidiaries, and interviewed representatives from the Federal Reserve 
Board and a large holding company. The scope of our work included a 
description of FHFB's examination program pertaining to advances but 
did not include an analysis of the program's effectiveness. However, we 
did analyze FHFB's collateral reporting requirements for the 12 
FHLBanks. Because the information contained in this report is 
potentially sensitive, we generally do not identify individual FHLBanks 
in this report. Instead, we identify each of the 12 banks by the 
letters A-L. For each report table, we changed the individual FHLBanks 
identified by the letters A-L. Appendix I contains a detailed 
description of the scope and methodology of our work.

We conducted our review from January to September 2003 in Washington, 
D.C.; New York, New York; Topeka, Kansas; Dallas, Texas; Atlanta, 
Georgia; and Pittsburgh, Pennsylvania, and Indianapolis, Indiana, in 
accordance with generally accepted government auditing standards.

Results in Brief:

The Federal Home Loan Bank Act (FHLBank Act), as amended by the Gramm-
Leach-Bliley Act (GLBA), and FHFB regulations establish the general 
pricing and other terms that each FHLBank can offer on its advances to 
member institutions. The FHLBanks are required to set interest rates on 
advances above their borrowing costs and must also factor in 
administrative and other expenses. The FHLBank Act and GLBA also 
require that each FHLBank take the necessary steps to ensure that its 
loans are fully secured by eligible collateral. The eligible collateral 
includes cash, residential mortgages, government and agency securities, 
qualified nonagency mortgage-backed securities, other real estate 
related collateral (ORERC), and small business and agricultural loans 
or securities representing a whole interest in such loans held by 
community financial institutions (CFI).[Footnote 4]

Within the framework established by statute and regulation for setting 
advance pricing terms and their independent authority within the 
FHLBank System, the FHLBanks have implemented several key differences 
in their policies, procedures, and practices. First, the FHLBanks have 
established sometimes differing formulas and business strategies to 
determine the interest rates to be charged on their advances. Moreover, 
some FHLBank officials told us that competition from other funding 
sources can influence advance interest rates, and some nationwide 
mortgage lenders play one FHLBank against another in an attempt to 
obtain favorable advance rates. Because of these differing business 
strategies and competitive pressures, available evidence indicates that 
there can be significant differences in stated advance rates among the 
FHLBanks for advances with comparable maturities. Many FHLBanks also 
charge different rates, depending upon the size of the advance, while 
others do not. Second, the FHLBanks have established differing 
collateral requirements for securing advances.

For example, the FHLBanks may apply differing haircuts to the same 
types of collateral (for example, one bank applies a 40 percent haircut 
to the book value of single-family mortgage loans pledged as 
collateral, while another bank applies a 15 percent haircut).[Footnote 
5] Third, the FHLBanks have established different advance borrowing 
capacity limits for their members; for example, 35 percent of a 
members' total assets at one FHLBank compared to 50 percent of assets 
at another. Fourth, although all 12 FHLBanks require their members to 
invest additional capital in the FHLBank based on their level of 
advances, the stock purchase requirements can differ (for example, from 
3.5 percent of advances at one FHLBank to 5.0 percent at another).

Holding companies face few direct regulatory restrictions in 
transferring assets among their federally insured bank or thrift 
subsidiaries who are members of different FHLBank districts.[Footnote 
6] Sections 23A and 23B of the Federal Reserve Act and Federal Reserve 
Regulation W and other federal laws do impose restrictions on certain 
transactions (for example, purchases of assets) between federally 
insured banks or thrifts and affiliated companies that are not insured 
so as to protect the financial condition of the insured 
institutions.[Footnote 7] However, Sections 23A and B and Regulation W 
and other federal laws generally exempt qualified insured banks or 
thrifts from these requirements when they engage in certain 
transactions with one another.[Footnote 8] According to Federal Reserve 
officials, these exemptions reflect the fact that under federal law, a 
federally insured institution within a holding company is generally 
liable for any losses incurred by the Federal Deposit Insurance 
Corporation (FDIC) as a result of the failure of any other federally 
insured institution controlled by the holding company. The exemptions 
allow insured depository affiliates to conduct business with each other 
without needing to comply with financial restrictions with the 
understanding that the FDIC can offset its losses resulting from the 
failure of one or more insured depository affiliates by seizing the 
assets of insured affiliates that do not fail. Although few direct 
regulatory restrictions exist to transferring assets, holding companies 
may face other hurdles in transferring assets among their insured 
depository subsidiaries, such as meeting bank regulatory capital 
requirements or the stock purchase requirements of individual 
FHLBanks.[Footnote 9] We also note that the Federal Reserve has not 
quantified the extent to which transfers of assets among subsidiaries 
take place and it is not clear whether holding companies engage in such 
transfers to increase competitive pressures within the FHLBank System.

FHFB carries out its safety and soundness oversight responsibilities 
for the FHLBank System by conducting annual examinations and through 
off-site monitoring.[Footnote 10] In 2001 and 2002, FHFB examinations 
did not identify significant violations in the FHLBank's advance term 
pricing or collateral practices. However, we identified weaknesses in 
the data that FHFB collects from the FHLBanks, which could limit FHFB's 
ability to monitor current and emerging trends within the System. On an 
annual basis, FHFB requests that the FHLBanks provide data on 
collateral securing advances in order to, along with other items, 
exhibit the System's safety and soundness. Because FHLBank officials do 
not have clear information about how FHFB would like the data reported, 
the FHLBanks use different reporting definitions and criteria, which 
limits the data's analytical usefulness. Although FHFB officials said 
that FHFB examiners used the collateral data during the FHLBank 
examination process, the agency plans to study current data reporting 
and collection procedures. Moreover, FHFB has not collected data 
necessary to assess the current extent of competition within the 
FHLBank System and the implications of holding companies with 
subsidiaries that operate in multiple FHLBank districts. By collecting 
data on, for example, the advance terms--such as interest rates--that 
holding company subsidiaries obtain from different FHLBanks, FHFB would 
be in a better position to (1) determine whether competition may affect 
FHLBank safety and soundness and (2) assess the potential impacts of 
multidistrict membership.

To strengthen its oversight capacity for the FHLBank System, we 
recommend that FHFB review the effectiveness of its current collateral 
data collection program and work with the FHLBanks to obtain data that 
are useful in assessing practices within the System. We also recommend 
that FHFB work with the FHLBanks to collect data necessary to assess 
the potential effects of competition on the safety and soundness of the 
FHLBank System.

We provided a draft of this report to FHFB, the FHLBank Presidents' 
Conference, and the Board of Governors of the Federal Reserve System 
for their review and comment. We received written comments from FHFB 
and the FHLBank Presidents' Conference--which are reprinted in 
appendixes III and IV---and technical comments from these organizations 
and the Federal Reserve, which have been incorporated where 
appropriate. FHFB agreed with the recommendations in the draft report 
that it review its data collection and reporting procedures to assess 
the FHLBanks collateral practices and competition within the System. 
The FHLBank Presidents' Conference commented that statutes and 
regulations allow individual FHLBanks to set advance pricing terms that 
allow the banks to meet the needs of their members while continuing to 
operate in a safe and sound manner. The Conference also said that they 
would work with FHFB to collect revised collateral data.

Background:

Established in 1932, each FHLBank is a government-sponsored enterprise 
(GSE) that is cooperatively owned by its members (see fig. 1 for the 
location of the 12 FHLBanks). The 12 FHLBanks, along with the Office of 
Finance (which issues debt on behalf of the FHLBanks), comprise the 
FHLBank System. The members of each FHLBank must buy stock in the 
FHLBank as a prerequisite for obtaining advances and other FHLBank 
services. FHLBank System assets consist of advances and investments, 
such as money market funds and mortgage-backed securities (see table 
1). In addition, FHLBank assets consist of acquired mortgages that the 
FHLBanks purchase from their members under the Mortgage Partnership 
Finance (MPF) program or Mortgage Purchase Program (MPP).[Footnote 11] 
The FHLBank-purchased mortgages consist of both conventional mortgages 
and federally insured and guaranteed mortgages.[Footnote 12]

Figure 1: Location of the 12 Federal Home Loan Banks:

[See PDF for image]

[End of figure]

Table 1: FHLBank System Assets, as of June 30, 2003:

Dollars in billions: 

Advances: $506; Mortgages: $90; Investments: $206; Other[A]: $7; Total 
assets: $809.

Source: Office of Finance. 

[A] These assets include interest bearing deposits and federal funds 
sold.

[End of table]

The FHLBank System raises funds in the capital markets partially on the 
strength of its ties to the federal government. Due to these ties, 
investors perceive an implied guarantee by the federal government on 
the System debt based on the belief that the government would come to 
the rescue of the FHLBank System rather than allow it to default on its 
obligations in the event of severe financial difficulties. The primary 
source of funds for the FHLBank System is the issuance of debt 
securities known as consolidated obligations, through its Office of 
Finance, which stood at $710 billion as of June 30, 2003. Consolidated 
obligations are the "joint and several" obligations of the FHLBanks and 
all of the banks may be required to cover such obligations of another 
bank that defaults on its repayment obligations. Under the joint and 
several structure, the potential for moral hazard exists. That is, 
FHLBanks may have incentives to take financial risks knowing that their 
losses would be covered by other FHLBanks or, ultimately, the federal 
government. Federal statutes and regulations as well as FHFB's 
oversight efforts--which are discussed in this report--are designed to 
help ensure that the FHLBanks conduct their business in a safe and 
sound manner.

The FHLBank Act provides that an eligible institution may become a 
member only of the FHLBank district in which its principal place of 
business is located, or an adjoining district for convenience purposes 
and if approved by FHFB. However, bank or thrift holding companies may 
own subsidiaries in two or more FHLBank districts and each eligible 
subsidiary may become a member of its district FHLBank. To become a 
FHLBank member, each subsidiary must be a separately chartered 
institution, such as a national bank or state-chartered bank or thrift. 
According to FHFB, approximately 100 bank or thrift holding companies 
currently operate in two or more FHLBank districts by having 
established separately chartered subsidiaries in those districts.

In 2000 and 2001, continuing a long standing trend, several holding 
companies with subsidiaries that operated in two or more FHLBank 
districts merged with or purchased financial institutions that were 
also members of FHLBank districts. These holding companies sought to 
consolidate the merged or purchased institutions under one existing 
charter and did not want to maintain separately chartered institutions. 
For example, Washington Mutual (WAMU)--a thrift holding company with 
subsidiaries in the Seattle, San Francisco, and Topeka FHLBank 
districts--purchased Bank United, a member of the Dallas FHLBank 
district, and Dime Savings, a member of the New York FHLBank district. 
WAMU chose not to maintain separate charters for Bank United and Dime 
Savings for business purposes and instead decided to merge the 
institutions into its existing subsidiaries. However, under FHFB 
regulations Dime Savings and Bank United could no longer remain members 
of the FHLBank System and could no longer obtain new advances or other 
services from the FHLBank of Dallas and the FHLBank of New York. 
Therefore, WAMU was required to pay back Bank United and Dime Savings' 
outstanding balances under their original terms.

In 2000, the FHLBank of Dallas submitted to the FHFB an application 
(which the FHFB subsequently treated as a petition) to grant approval 
to WAMU's thrift subsidiary's application for membership in the FHLBank 
of Dallas while maintaining its membership in the FHLBank of San 
Francisco (the petition has been referred to as advocating 
multidistrict membership). The Dallas FHLBank filed the petition under 
the "demanded by convenience" standard.[Footnote 13] After the initial 
petition, FHFB received similar requests from three other FHLBanks, 
requests to intervene, and comment letters both in favor and 
against.[Footnote 14] Given the controversy associated with these 
petitions and their potential effects on the System (including the 
potential for increased competition among the FHLBanks), FHFB did not 
act on them and, in October 2001, requested comments from the public on 
the petitions. In 2002, FHFB obtained a legal opinion from a law firm 
stating that it had the legal authority, under certain conditions, to 
approve multidistrict membership under its broad safety and soundness 
regulatory authority and requested that the 12 FHLBanks answer 
questions related to multidistrict membership, which the FHLBanks did 
by February 2003. During 2003, FHFB staff, at the direction of the 
agency's chairman, analyzed the benefits and costs associated with 
multidistrict membership.

Statutes and Regulations Establish the General Pricing and Other Terms 
Each FHLBank Can Offer on Advances to Member Institutions:

The FHLBank Act, as amended by GLBA, and FHFB regulations establish the 
general pricing and other terms that each FHLBank can offer on its 
advances.[Footnote 15] Statutory and regulatory provisions establish 
requirements for FHLBank pricing on advances, allow for price 
differentiation at the FHLBanks, require that advances must be fully 
secured, and establish eligible types of collateral. FHFB regulations 
establish more specific requirements to help ensure that the FHLBanks 
conduct their advance business in a safe and sound manner.

General Requirements for Terms on Advance Pricing:

According to FHFB regulations issued pursuant to the FHLBank Act, 
FHLBank advances may not be priced below the marginal cost to the 
FHLBank of raising matching term and maturity funds in the marketplace, 
including embedded options, plus the administrative and operating costs 
associated with making advances.[Footnote 16] FHLBanks are allowed to 
differentiate in advance prices based on the FHLBank's assessment of 
the credit and other risk of lending to any particular member, or other 
reasonable criteria.

Per FHFB's guidance, such differentiation could include providing 
discounts to members based on the volume of the advance.[Footnote 17] 
Each FHLBank is to include in its member products policy standards and 
criteria for differential pricing and is to apply its standards and 
criteria consistently and without discrimination to all members.

The FHLBank Act, as amended by GLBA, requires that FHLBanks fully 
secure their advances with eligible collateral. The eligible 
collateral, as listed in table 2, ranges from whole single family 
mortgages to small business and agricultural loans.[Footnote 18] GLBA, 
which amended the FHLBank Act, expanded the collateral that member 
institutions could use to secure an advance. In particular, GLBA 
allowed CFIs, those FHLBank System members that are FDIC insured 
depository institutions that currently have $538 million or less in 
total assets, to pledge small business and agricultural loans as 
collateral. GLBA allowed CFIs to use the expanded collateral categories 
because some small institutions lacked a sufficient quantity of other 
types of assets--such as mortgage loans--necessary to secure FHLBank 
advances. GLBA also allowed all FHLBank members to make greater use of 
ORERC--such as commercial real estate loans and home equity loans--as 
collateral for advances. The FHLBanks may restrict the types of 
eligible collateral available to them as security, based upon the 
creditworthiness or operations of the borrower, the quality of the 
collateral, or other reasonable criteria.

Table 2: Types of Eligible Collateral in the FHLBank System:

1. Fully disbursed, whole first single-family or multifamily mortgages 
on improved residential property (not more than 90 days delinquent), or 
securities representing a whole interest in these mortgages.

2. Securities issued, insured, or guaranteed by the United States or a 
U.S. agency, including mortgage-backed securities issued by Fannie Mae 
or Freddie Mac.[A].

3. Cash or deposits at a FHLBank.

4. Other real estate related collateral, such as home equity loans or 
commercial real estate, acceptable to the FHLBank and subject to 
certain conditions.

5. Secured loans for small business, agriculture, or securities 
representing a whole interest in such secured loans, in the case of any 
CFI.

Source: FHLBank Act as amended.

[A] As part of their business activities, Fannie Mae and Freddie Mac 
issue mortgage-backed securities.

[End of table]

By fully securing advances with eligible collateral as required by the 
FHLBank Act, FHLBanks can protect their interests should one or more of 
their members fail. Typically, FHLBanks make advances on what is known 
as a blanket lien; that is, the FHLBank has the authority to take 
control of all the assets that are eligible as collateral on a member's 
books. In cases in which an FHLBank determines that a member is 
experiencing financial difficulty, the FHLBank may require the member 
to list specific assets that are securing advances or may even require 
the member to deliver the collateral to the FHLBank.[Footnote 19] 
Should the member fail, the FHLBank can sell the pledged collateral to 
ensure repayment of principal and the interest on the advance. Due in 
part to the collateralization requirements, the FHLBank System has 
never experienced a loss on an advance.

FHFB Regulations Establish Additional Advance Term Requirements:

FHFB has issued several regulations that are designed to help ensure 
that the FHLBanks make advances in a safe and sound manner. For 
example, FHFB has established regulations pertaining to the use of 
ORERC and small business and agricultural loans as collateral, which 
are generally considered riskier than other forms of collateral, such 
as single-family mortgages. FHFB regulations require that FHLBanks can 
reliably discount the value of ORERC and small business and 
agricultural loans pledged as collateral. Under its regulations, FHFB 
also has the authority to require an FHLBank to increase its standards 
for all forms of eligible collateral. FHFB requires through regulation 
that FHLBanks take the necessary steps to ensure that collateral is 
secure and to establish written procedures for verifying the existence 
of collateral.

Significant Differences Exist in Key Advance Pricing Terms among the 
FHLBanks:

Although the FHLBank Act and FHFB regulations establish the advance 
pricing framework, each FHLBank has independent authority within the 
framework to establish specific policies and procedures to meet its 
business and member requirements. Our review of key advance pricing 
terms--advance interest rates, collateral requirements, advance 
borrowing capacity, and capital stock purchase requirements--
identified several significant differences among the 12 FHLBanks. The 
FHLBanks may charge different interest rates on advances with 
comparable maturities, some may establish interest rates on the basis 
of advance size while others do not, and the FHLBanks apply differing 
haircuts to the same type of collateral, establish different borrowing 
limits, and require members to purchase FHLBank stock in differing 
amounts depending upon their levels of advances outstanding.

Advance Interest Rates May Vary Based on FHLBank Operating Costs, 
Business Strategies, and Competition from Other Sources:

The process of setting advance interest rates can depend on several key 
factors, including cost of funds, operating expenses, business 
strategies, and competition from other sources, and may differ from one 
FHLBank to another. In general, each FHLBank attempts to set advance 
interest rates at a level that covers its costs--including cost of 
funds and operating expenses--while allowing for the payment of a 
reasonable rate of return (typically through the payment of dividends) 
to member institutions. Although the FHLBanks generally have the same 
cost of funds because they borrow through the Office of Finance, they 
may have different operating expenses to administer their advance 
business.[Footnote 20] Moreover, the business strategies adopted by 
individual FHLBanks may also influence the advance interest rates that 
they charge to members. In particular, FHLBank officials said that 
there can be a connection between the advance interest rate that they 
charge and the dividend rate that they pay. That is, an FHLBank 
choosing to pay a relatively high dividend may need to charge a 
relatively high advance rate to earn sufficient profits to cover the 
costs associated with the dividend. In contrast, other FHLBanks may 
decide to provide value to their members through lowering their advance 
rates, which may mean a decrease in their dividend. Table 3 shows that 
some FHLBanks consistently pay higher dividends than others. For 
example, Bank E paid an average dividend of 7.63 percent from 1997 
through 2002, which was 250 basis points higher than the average 
dividend of Bank L over the same period.

Table 3: FHLBanks' Average Annual Dividend Rates, 1997-2002: 

FHLBanks: A; 1997: 6.1; 1998: 5.76; 1999: 5.36; 2000: 7.17; 2001: 5.99; 
2002: 5.45; Average: 5.97; Rank: 10.

FHLBanks: B; 1997: 6.82; 1998: 6.63; 1999: 6.69; 2000: 7.38; 2001: 
6.34; 2002: 5.25; Average: 6.52; Rank: 6.

FHLBanks: C; 1997: 6.48; 1998: 6.4; 1999: 6.54; 2000: 7.63; 2001: 5.87; 
2002: 3.68; Average: 6.10; Rank: 9.

FHLBanks: D; 1997: 7; 1998: 6.63; 1999: 6.3; 2000: 6.92; 2001: 4.45; 
2002: 3; Average: 5.73; Rank: 11.

FHLBanks: E; 1997: 7.99; 1998: 8.01; 1999: 8; 2000: 8.25; 2001: 7.44; 
2002: 6.06; Average: 7.63; Rank: 1.

FHLBanks: F; 1997: 7.25; 1998: 7.38; 1999: 7.13; 2000: 8.03; 2001: 
6.78; 2002: 4.56; Average: 6.86; Rank: 4.

FHLBanks: G; 1997: 6.6; 1998: 7.25; 1999: 6.8; 2000: 6.95; 2001: 6.29; 
2002: 4.51; Average: 6.40; Rank: 7.

FHLBanks: H; 1997: 7.19; 1998: 7.19; 1999: 7.06; 2000: 7.34; 2001: 
6.75; 2002: 4.63; Average: 6.69; Rank: 5.

FHLBanks: I; 1997: 7.69; 1998: 7.69; 1999: 7.36; 2000: 6.5; 2001: 6.88; 
2002: 5.98; Average: 7.02; Rank: 2.

FHLBanks: J; 1997: 6.38; 1998: 6.5; 1999: 6.63; 2000: 7.06; 2001: 6.5; 
2002: 3.56; Average: 6.11; Rank: 8.

FHLBanks: K; 1997: 7.25; 1998: 7.44; 1999: 7.56; 2000: 7.75; 2001: 
6.75; 2002: 5.31; Average: 7.01; Rank: 3.

FHLBanks: L; 1997: 5.95; 1998: 5.92; 1999: 5.5; 2000: 6.36; 2001: 4.13; 
2002: 2.94; Average: 5.13; Rank: 12.

Source: FHLBanks.

Note: The A-L listing of the FHLBanks in this table differs from the A-
L listings in other tables in this report.

[End of table]

FHLBank business strategies involving other assets--such as mortgage 
purchase programs and other investments--may also influence the 
interest rate that they charge on advances. For example, the potential 
exists that the degree to which an FHLBank participates in the MPP or 
the MPF program would affect its advance interest rate. If an FHLBank 
commits substantial resources to the MPP or the MPF program, it may use 
any profits earned to offset the advance interest rate or it may use 
funds earned from advances to support the MPP or MPF program. Or, the 
FHLBank could use the profits to pay a higher dividend and leave 
advance rates unchanged or some combination thereof. Available evidence 
suggests that there is wide variation within the FHLBank System on the 
extent to which individual banks participate in the asset purchase 
programs. For example, more than 46 percent of the assets at one 
FHLBank now consist of acquired mortgages while the ratio is only 1.5 
percent at another FHLBank. Similarly, FHLBanks could also increase 
investments in other types of assets, such as mortgage-backed 
securities, and use the income derived to offset advance interest rates 
or pay a higher dividend.

Some FHLBank officials told us that competition from other sources can 
also influence the interest rates that they charge on advances. For 
example, officials said that they monitor other financial markets--such 
as the repo market--to determine how competitive their advance rates 
are with other funding sources.[Footnote 21] In addition, some FHLBank 
officials said that competition may also arise from the advance 
interest rates and other terms offered by other FHLBanks. The officials 
said that large bank or thrift holding companies that have subsidiaries 
in multiple FHLBank districts sometimes play one FHLBank against 
another in an attempt to obtain more favorable advance pricing terms. 
Some FHLBank officials said that they will adjust their advance 
interest rates within established parameters to ensure that their rates 
are competitive with other sources of funds. An individual FHLBank's 
willingness to compete with other fund providers could influence 
differences in advance rates across the FHLBanks.

Given the variety of factors that may be involved in setting advance 
interest rates, we are unable to explain completely why individual 
FHLBanks charge the rates that they do. Nevertheless, limited available 
data indicate that these factors result in sometimes significant 
differences in interest rates on advances with comparable maturities. 
Table 4 shows the advance interest rates for eleven FHLBanks on June 
10, 2003 (the other FHLBank stated that its advance interest rate data 
were proprietary). The differences between the lowest and highest 
interest rates can be significant. For example, for an advance of 12 
months, the difference between Bank H and D was 36 basis points.

Table 4: Comparison of Selected FHLBank Interest Rates on Fixed Rate 
Advances (June 10, 2003)A:

Term: 12 mo; Bank A: 1.16; Bank B: 1.29; Bank C: 1.10; Bank D: 1.43; 
Bank E: 1.37; Bank F: 1.29; Bank G: 1.22; Bank H: 1.07; Bank I: 1.31; 
Bank J: 1.3; Bank K: 1.41; Range: 1.07-1.43; Difference in basis 
points: 36.

Term: 24 mo; Bank A: 1.42; Bank B: 1.45; Bank C: 1.35; Bank D: 1.62; 
Bank E: 1.58; Bank F: 1.51; Bank G: 1.46; Bank H: 1.36; Bank I: 1.56; 
Bank J: 1.55; Bank K: 1.62; Range: 1.35-1.62; Difference in basis 
points: 27.

Term: 36 mo; Bank A: 1.75; Bank B: 1.82; Bank C: 1.74; Bank D: 1.92; 
Bank E: 2.01; Bank F: 1.88; Bank G: 1.79; Bank H: 1.71; Bank I: 1.91; 
Bank J: 1.9; Bank K: 1.95; Range: 1.71-2.01; Difference in basis 
points: 30.

Term: 48 mo; Bank A: 2.16; Bank B: 2.27; Bank C: 2.18; Bank D: 2.39; 
Bank E: 2.42; Bank F: 2.27; Bank G: 2.21; Bank H: 2.21; Bank I: 2.39; 
Bank J: 2.3; Bank K: 2.36; Range: 2.16-2.42; Difference in basis 
points: 26.

Term: 60 mo; Bank A: 2.53; Bank B: 2.58; Bank C: 2.53; Bank D: 2.71; 
Bank E: 2.79; Bank F: 2.63; Bank G: 2.58; Bank H: 2.55; Bank I: 2.74; 
Bank J: 2.66; Bank K: 2.72; Range: 2.53-2.79; Difference in basis 
points: 26.

Source: Selected FHLBanks.

Note: The A-K listing of the FHLBanks in this table differs from the 
alphabetic listings in other tables in this report.

[A] The interest rates shown are generally for regular fixed term and 
rate advances with no discounting. We also obtained advance interest 
rate data from the FHLBanks on July 18 and 25, 2003 to replicate our 
results (see app. II). The FHLBanks also differ in their policies 
regarding payment frequency and daycount accrual methods. No attempt is 
made here to harmonize the data to a single payment frequency and 
daycount accrual standard.

Due to our reporting deadlines, the scope of our work did not involve 
obtaining comparable historical data on the advance interest rates 
charged by individual FHLBanks. We obtained the data from the Web sites 
of nine FHLBanks while two other FHLBanks provided the data separately. 
One FHLBank stated that its advance interest rate data were 
proprietary. Of the nine FHLBanks that do publish advance interest rate 
data on their Web sites, some publish historical data while others do 
not. Of banks that do report historical rate data, some use different 
and incomparable reporting methodologies. Additionally, the FHLBanks 
reserve the right to negotiate with members on advance interest rates; 
therefore, the advance interest rates posted on the FHLBanks Web sites 
may or may not be the rate paid by all members. 

[End of table]

Most FHLBanks Offer Discounts on Advance Rates Based on Volume:

Our review indicates that eight FHLBanks have established specific 
programs that offer volume-driven advance rate discounts, while four 
others have not established such programs (see table 5). Under these 
programs, also referred to as tiered pricing, the FHLBank may reduce 
the standard interest rate charged on advances depending upon the size 
of the advance. The programs operate similarly as each passes on to 
members the economies of scale the FHLBanks realize from high-volume 
transactions. However, as table 5 illustrates, the number of pricing 
tiers at each FHLBank varies; three banks have established two tiers, 
two banks have established three tiers, two banks have established four 
tiers, and one bank states that it provides volume-driven discounts. 
The basis point discounts that the FHLBanks offer on volume driven 
discounts can also vary. For example, one FHLBank reduces its advance 
rates 15 to 20 basis points for advances over $25 million, while 
another FHLBank reduces its advance interest rates 6 to 12 basis 
points.

Table 5: Tiered Advance Pricing Programs at the FHLBanks:

FHLBanks: Bank A; Tiered pricing (Y/N): No.

FHLBanks: Bank B; Tiered pricing (Y/N): Yes; Tiered pricing program 
descriptions: 2 Tiers:; Tiered pricing program descriptions: Advances 
under $25 million; Advances over $25 million.

FHLBanks: Bank C; Tiered pricing (Y/N): No.

FHLBanks: Bank D; Tiered pricing (Y/N): No.

FHLBanks: Bank E; Tiered pricing (Y/N): Yes; Tiered pricing program 
descriptions: [Empty]; Tiered pricing program descriptions: Volume 
discounts on large advances.

FHLBanks: Bank F; Tiered pricing (Y/N): Yes; Tiered pricing program 
descriptions: 2 Tiers: Tiered pricing program descriptions: Advances 
under $10 million; Advances $10 million and over.

FHLBanks: Bank G; Tiered pricing (Y/N): Yes; Tiered pricing program 
descriptions: 2 Tiers: Tiered pricing program descriptions: Advances 
under $25 million; Advances $25 million and over.

FHLBanks: Bank H; Tiered pricing (Y/N): Yes; Tiered pricing program 
descriptions: 4 Tiers: Tiered pricing program descriptions: Advances 
$5-24 million; Advances $25-49 million; Advances $50-99 million; 
Advances $100 million and over.

FHLBanks: Bank I; Tiered pricing (Y/N): Yes; Tiered pricing program 
descriptions: 4 Tiers: Tiered pricing program descriptions: Advances 
under $10 million; Advances $10-24 million; Advances $25-99 million; 
Advances $100 million and over.

FHLBanks: Bank J; Tiered pricing (Y/N): Yes; Tiered pricing program 
descriptions: 3 Tiers: Tiered pricing program descriptions: Advances 
under $5 million; Advances $5-25 million; Advances over $25 million.

FHLBanks: Bank K; Tiered pricing (Y/N): Yes; Tiered pricing program 
descriptions: 3 Tiers: Tiered pricing program descriptions: Advances 
for less creditworthy members required to deliver collateral; Advances 
under $10 million (standard pricing tier); Advances over $10 million.

FHLBanks: Bank L; Tiered pricing (Y/N): No.

Source: FHLBanks.

Note: The A-L listing of the FHLBanks in this table differs from the A-
L listing in other tables in this report.

[End of table]

FHLBank officials said that their large members are the primary 
beneficiaries of the tiered pricing programs because they have the 
capacity to borrow in large volumes. However, officials from two 
FHLBanks also said that they will aggregate advance requests from 
smaller members so that they can benefit from volume-driven rates as 
well. Representatives from several FHLBanks, including those that do 
not have tiered pricing programs, said that they also periodically 
offer "special deals" on advance rates to all of their members. If a 
FHLBank, for example, obtains favorable borrowing costs, it may pass 
these savings on to its members through special deals that are 
announced by fax or e-mail.

With respect to the four FHLBanks that do not have specific tiered 
pricing programs, officials said that they preferred to offer the same 
advance rate to all members. Although these FHLBanks do not have 
specific tiered pricing programs based on volume, they may 
differentiate in price in other ways. For example, one FHLBank offers 
standard rates on all advances requested by telephone but offers 
specified discounts on advance requests made through its secured Web 
site. Officials from this bank said that more than 98 percent of its 
advances are made through the Web site. Banks that do offer tiered 
pricing programs may also offer differing advance rates on the basis of 
the creditworthiness of their members. For example, one FHLBank has 
established 10 separate categories that have different interest rates 
and collateral requirements depending upon a member's creditworthiness. 
This FHLBank, as do other FHLBanks, establishes members' 
creditworthiness through, among other steps, reviewing publicly 
available financial information and conducting on-site visits to review 
collateral management practices.

We also note that analyzing the FHLBanks' tiered pricing programs was 
difficult, because the programs are not fully transparent as some banks 
"negotiate" prices with larger members. Some FHLBank officials said 
that larger members periodically request advance terms that differ from 
posted rates and that FHLBank representatives do have some authority to 
customize deals. For example, officials at one FHLBank said that its 
representatives had the authority to negotiate the stated advance 
interest rates. None of the FHLBank officials we contacted said that 
they had authority to negotiate based on collateral standards. Some 
FHLBank officials said that they notify their members of the terms of 
negotiated transactions whenever they take place (for example, by e-
mail). Other FHLBank officials said that they will make the terms of 
negotiated deals available only when another member requests an advance 
with similar features.

FHLBanks Have Established Sometimes Differing Collateral Requirements 
for Securing Advances:

The FHLBanks may also apply differing haircuts to collateral pledged by 
member institutions to secure advances. Table 6 shows the haircuts that 
the FHLBanks apply under their blanket liens to single-family mortgage 
collateral, which is considered one of the most secure forms of 
collateral. Several FHLBanks apply a range of haircuts to single-family 
collateral (for example, FHLBank C) based on their assessments of the 
credit risk of the collateral. For those banks that apply one haircut 
to single-family collateral, the haircut differences can be 
significant. For example, a member could borrow up to 85 percent of its 
pledged single-family collateral at FHLBank L (which has a 15 percent 
haircut) but only up to 60 percent at FHLBank J (which has a 40 percent 
haircut). We note that the FHLBanks have established other advance 
borrowing limits for their members, which are discussed in the next 
section.

Table 6: FHLBank Haircuts for Single-Family Mortgage Collateral under 
the Blanket Lien Option:

FHLBanks: Bank A; Collateral haircut[A]: 9 -20% [B].

FHLBanks: Bank B; Collateral haircut[A]: 20% [C].

FHLBanks: Bank C; Collateral haircut[A]: 20-43% [D].

FHLBanks: Bank D; Collateral haircut[A]: 17%.

FHLBanks: Bank E; Collateral haircut[A]: 25%.

FHLBanks: Bank F; Collateral haircut[A]: 25% or more.

FHLBanks: Bank G; Collateral haircut[A]: 17-44% [E].

FHLBanks: Bank H; Collateral haircut[A]: 31 or 40% [F].

FHLBanks: Bank I; Collateral haircut[A]: 31%.

FHLBanks: Bank J; Collateral haircut[A]: 40%.

FHLBanks: Bank K; Collateral haircut[A]: 25%.

FHLBanks: Bank L; Collateral haircut[A]: 15%.

Source: FHLBanks.

Note: The A-L listing of the FHLBanks in this table differs from the A-
L listing in other tables in this report.

[A] The FHLBanks use different methods to reflect the percentage 
haircut requirement on collateral. We have converted their different 
measures to one consistent standard for purposes of comparison. Eleven 
of the 12 FHLBanks generally apply haircuts to the book value of 
eligible collateral, while one has established a methodology to apply 
haircuts to the fair market value of the collateral. 

[B] Haircut depends upon the creditworthiness of the member.

[C] Bank determines fair market value of collateral. The Bank will use 
"book value" as fair market value for nondelivered, nonsecurities 
collateral where a fair market value estimate is unavailable.

[D] Range depends on a creditworthiness assessment rating.

[E] The haircut depends upon the relative riskiness of the collateral.

[F] Amount reflected is for reviewed loans that have either an 
adjustable rate (31%) or a fixed rate (40%).

[End of table]

Our review also identified other differences in the FHLBanks collateral 
standards. For example, we found that several FHLBanks require or 
prefer their members to pledge all of their single-family mortgages as 
collateral before they will consider the use of other types of 
collateral--such as ORERC or small business and agricultural loans--to 
secure advances. In contrast, other FHLBanks allow members to pledge 
any form of eligible collateral--such as commercial real estate loans-
-to secure advances without requiring that other types of eligible 
collateral be used first.

Borrowing Capacity Limits Vary Across the FHLBanks:

To minimize the risks associated with making advances to their members, 
the FHLBanks have also established borrowing capacity limits, which can 
vary. Table 7 shows that three FHLBanks allow their members to obtain 
advances equal to the value of all their eligible collateral after 
appropriate haircuts have been applied. These FHLBanks borrowing limits 
do not include a specific limit on the ratio of advances to a member's 
total assets as is the case at the other nine banks. Of the nine banks 
with specific ratio limits, the borrowing limits vary to some extent; 
for example, one FHLBank sets total advance borrowings at 35 percent of 
a member's assets. Other FHLBanks may allow members to borrow up to 50 
percent of their total assets without board approval and, in one case, 
up to 55 percent if approved by the bank president. The borrowing 
capacity of individual members is determined on a case-by-case basis 
depending on the creditworthiness of the member and the member's 
collateral.

Table 7: FHLBank System Borrowing Capacity Limits: 

FHLBank: Bank A; Member bank borrowing capacity (BC) limits[A]: Total 
eligible collateral after appropriate discounts.

FHLBank: Bank B; Member bank borrowing capacity (BC) limits[A]: 40 
percent of total assets; Financial status may dictate a lower BC.

FHLBank: Bank C; Member bank borrowing capacity (BC) limits[A]: Total 
eligible collateral multiplied by appropriate haircut, minus the member 
bank's obligations.

FHLBank: Bank D; Member bank borrowing capacity (BC) limits[A]: 40 
percent of total assets, up to 55 percent if approved by the bank 
president.

FHLBank: Bank E; Member bank borrowing capacity (BC) limits[A]: 50 
percent of member's total assets; Financial status and/or collateral 
requirements may dictate a higher/lower BC.

FHLBank: Bank F; Member bank borrowing capacity (BC) limits[A]: Overall 
credit exposure to total assets may not exceed 50 percent. Bank may 
apply additional borrowing limits as applicable.

FHLBank: Bank G; Member bank borrowing capacity (BC) limits[A]: Bank 
assigns borrowing capacity percentage to eligible collateral.

FHLBank: Bank H; Member bank borrowing capacity (BC) limits[A]: 50 
percent of a member's total assets, higher with consent of the board.

FHLBank: Bank I; Member bank borrowing capacity (BC) limits[A]: Total 
eligible (unpledged) collateral after appropriate haircuts.

FHLBank: Bank J; Member bank borrowing capacity (BC) limits[A]: 40 
percent of total assets.

FHLBank: Bank K; Member bank borrowing capacity (BC) limits[A]: 50 
percent of adjusted assets (member's assets minus borrowings from all 
sources).

FHLBank: Bank L; Member bank borrowing capacity (BC) limits[A]: Under 
blanket lien, total secured borrowings must be less than 35 percent of 
total assets. Single-family mortgage loans should equal at least 10 
percent of total assets.

Source: FHLBank policy manuals and interviews with FHLBank officials.

Note: The A-L listing of the FHLBanks in this table differs from the A-
L listing in other tables in this report.

[A] Capacity limits established by banks are always subject to the 
amount of eligible collateral held by a member.

[End of table]

FHLBanks Require Members to Purchase Different Amounts of Capital Stock 
Depending upon Advance Activity:

FHLBanks have also established activity based stock purchase 
requirements for advances, which can differ (see table 8).[Footnote 22] 
As the table indicates, the specific capital ratio requirements can 
differ; for example, FHLBank L has a 3.5 percent stock purchase 
requirement while FHLBank G has a 5 percent requirement.

Table 8: FHLBanks' Advances Activity Based Stock Purchase Requirements:

FHLBank: A; Capital requirement[A]: 4.7%.

FHLBank: B; Capital requirement[A]: 4.75%.

FHLBank: C; Capital requirement[A]: 4.5%.

FHLBank: D; Capital requirement[A]: 2 - 4%[B].

FHLBank: E; Capital requirement[A]: 4.5%.

FHLBank: F; Capital requirement[A]: 4.25%.

FHLBank: G; Capital requirement[A]: 5%.

FHLBank: H; Capital requirement[A]: 4.5%.

FHLBank: I; Capital requirement[A]: 4.45%.

FHLBank: J; Capital requirement[A]: 4.5%.

FHLBank: K; Capital requirement[A]: 5%.

FHLBank: L; Capital requirement[A]: 3.5%.


Source: FHLBanks.

Note: The A-L listing of the FHLBanks in this table differs from the A-
L listing in other tables in this report.

[A] FHFB has approved new capital plans for all 12 FHLBanks. These 
plans include the capital requirements for each of the FHLBanks. The 
table reflects the approved capital requirements of the 12 FHLBanks. As 
of the time of this report, 5 banks have implemented their new 
requirements. The FHLBank boards of directors set ranges of capital to 
advances ratios, and then choose a specific ratio of capital stock that 
members are required to meet when taking out advances. Only the 
specific ratios are shown in the table.

[B] The FHLBank's advance activity capital requirement range of 2 to 4 
percent has been set by its board within a larger range of 1 to 6 
percent. The capital requirement within the 2 to 4 percent range is 
based on the extent of the excess stock held by each member and the 
FHLBank at any particular point in time. The member may use (borrow) 
FHLBank excess stock under certain conditions rather than purchase 
additional stock, which could make the FHLBank overcapitalized.

[End of table]

Holding Companies Can Generally Transfer Funds and Assets among Their 
Insured Subsidiaries:

Although Section 23A and 23B of the Federal Reserve Act and Regulation 
W impose restrictions on the transfer of assets among some subsidiaries 
of holding companies, these restrictions generally do not apply to 
transfers of assets between depository institution subsidiaries that 
are federally insured.[Footnote 23] Accordingly, each of the more than 
100 holding companies that have federally insured bank or thrift 
subsidiaries that are members of various FHLBank districts may be able 
to transfer assets among their insured depository subsidiaries with few 
restrictions under specified conditions. However, holding companies may 
face some hurdles--such as managing their balance sheets or meeting 
capital requirements--when transferring assets from one insured 
subsidiary to another. We also note that the Federal Reserve has not 
quantified the extent to which transfers of assets among subsidiaries 
take place, and it is not clear whether holding companies engage in 
such transfers to increase competitive pressures within the FHLBank 
System.

Sections 23A and 23B of the Federal Reserve Act Limit Transactions 
between Affiliates:

Sections 23A and 23B of the Federal Reserve Act set limits on covered 
transactions between a depository institution and its 
affiliates.[Footnote 24] Sections 23A and 23B are designed to protect 
against a depository institution suffering losses in transactions with 
affiliates. They limit the ability of a depository institution to 
transfer to its affiliates the subsidy arising from the institution's 
access to the federal safety net, including the deposit insurance 
funds. Under section 23A, a bank's affiliates include, among other 
companies, any companies that control the bank, any companies under 
common control with the bank, and certain investment funds that are 
advised by the bank or an affiliate of the bank. Affiliate has the same 
meaning under 23B as the meaning given under 23A, except that the term 
affiliate under 23B does not include an insured bank or an insured 
savings association.

According to Section 23A, a bank's covered transactions with any single 
affiliate cannot exceed 10 percent of the bank's capital stock and 
surplus, and transactions with all affiliates combined cannot exceed 20 
percent of the bank's capital stock and surplus. All transactions 
between a bank and its affiliates must be on terms and conditions that 
are consistent with safe and sound banking practices, and a bank cannot 
purchase low quality assets from its affiliates. Finally, section 23A 
requires that a bank's extensions of credit to affiliates and 
guarantees on behalf of affiliates be appropriately secured by a 
statutorily defined amount of collateral. Section 23B requires that 
certain transactions between a bank and its affiliates occur on market 
terms. This is defined to mean that the transaction must take place on 
terms and under circumstances that are substantially the same, or at 
least as favorable to the bank, as those prevailing at the time for 
comparable transactions with unaffiliated companies.

Transactions that are covered by 23A and 23B include (1) purchases of 
assets by a bank from an affiliate, (2) extensions of credit by a bank 
to an affiliate, (3) investments by a bank in securities issued by an 
affiliate, (4) guarantees by a bank on behalf of an affiliate, and (5) 
certain other transactions that expose the bank to an affiliate's 
credit or investment risk. Section 23B also applies to any sale of 
assets by the bank to an affiliate, any payment of money or furnishing 
of services by the bank to an affiliate, and any transaction by the 
bank with a third party if an affiliate has a financial interest in the 
third party or in an affiliate that is a participant in the 
transaction.

Sister Banking Exemption Allows Transfer of Assets among Subsidiaries 
of Bank and Thrift Holding Companies:

Section 23A exempts several types of transactions from certain aspects 
of the statute. One exemption, known as the Sister Bank Exemption, 
exists for transactions between a bank or thrift and another bank or 
thrift if a company controls 80 percent or more of the voting 
securities of both banks or thrifts or if one bank controls 80 percent 
or more of the voting securities of the other. The exemption applies 
only to transactions between insured depository institutions. Because 
Section 23B exempts banks and thrifts from its definition of affiliate, 
sister banks (those banks that qualify for the exemption) are also 
exempt from the requirement that transactions between insured banks or 
thrifts and their affiliates be conducted on an arm's length basis. 
According to the Federal Reserve, these exemptions reflect the fact 
that, under the cross-guarantee provisions of the Federal Deposit 
Insurance Act, an insured depository institution is generally liable 
for any loss incurred by the FDIC in connection with the default of a 
commonly controlled depository institution. All transactions between a 
bank and its affiliates (including sister bank affiliates) are 
required, though, to be on terms and conditions that are consistent 
with safe and sound banking practices.[Footnote 25] In addition, a bank 
may not purchase a low-quality asset from an affiliate (including a 
sister bank affiliate) unless the bank or its subsidiary, pursuant to 
an independent credit evaluation, committed itself to purchase such 
asset prior to the time such asset was acquired by the affiliate. 
Although a Federal Reserve official could not provide specific data on 
the number of insured holding company subsidiaries that qualify for the 
exemption, he estimated that more than 90 percent do so.

While Sections 23A and 23B and Regulation W impose few legal 
restrictions on holding companies selling assets among their insured 
depository subsidiaries for securing advances from different FHLBanks, 
there can be some bookkeeping and regulatory hurdles. Officials from 
one large thrift holding company with whom we spoke said that there are 
balance sheet management hurdles associated with the sale of assets 
from one subsidiary to another. For example, the officials said that 
asset sales may involve 
"de-pledging" assets pledged as collateral to secure advances at one 
FHLBank and pledge them to another FHLBank. Subsidiaries meeting the 
sister bank requirements must also ensure that the sale of assets meets 
bank regulatory agency capital requirements.[Footnote 26] In addition, 
each FHLBank has established membership stock purchase requirements, 
which would require a subsidiary that received assets from an affiliate 
to purchase additional capital from the FHLBank. We note that the 
membership capital requirements for each FHLBank can differ.

We also note that it is difficult to determine the extent to which 
holding companies transfer assets between their subsidiaries and 
whether any such transfers result in competition between the FHLBanks. 
Federal Reserve officials said that they do not collect data on 
transfers of assets among subsidiaries, although one Federal Reserve 
official said that such transfers occur frequently. FHFB officials 
commented that it was not clear that holding companies had financial 
incentives to move collateral from one subsidiary to another to obtain 
favorable advance rates. The FHFB officials said that if a subsidiary 
had sufficient cash to purchase collateral from an affiliate, it 
already would have sufficient eligible collateral to secure advances 
from its local FHLBank and would not need additional collateral.

FHFB Has Not Identified Significant Advance Term Pricing Deficiencies, 
but FHLBank Safety and Soundness Data Reporting Can Be Improved:

FHFB is responsible for helping ensure that the FHLBanks follow 
statutory and regulatory requirements in making advances and that 
competitive pressures within the FHLBank System do not compromise the 
System's safety and soundness. Although the FHLBanks have adopted 
differing approaches to setting advance pricing terms, FHFB's 
examination program has not identified significant violations in the 
banks' practices over the past several years. However, as part of its 
oversight efforts, FHFB collects data on FHLBank collateral practices 
that have questionable value in their current format. In addition, FHFB 
does not collect data necessary to fully assess competition within the 
FHLBank System, such as data on the advance terms that holding company 
subsidiaries may receive from different FHLBanks. Such data would also 
help FHFB assess the potential risks associated with multidistrict 
membership.

FHFB Examinations Have Not Identified Serious Advance Term Pricing 
Deficiencies:

FHFB carries out its oversight responsibilities through, among other 
means, annual examinations and off-site monitoring. During the 
examination process, FHFB examiners review a range of activities at 
each FHLBank, such as its asset and liability management, collateral 
management practices, and compliance with relevant laws and 
regulations. Off-site monitoring is typically carried out by FHFB 
headquarters staff and involves the review of financial data that 
provides information and insights into the safety and soundness of the 
FHLBanks. Regular off-site monitoring between annual examinations is 
important because the FHLBanks' financial conditions and risks can 
change significantly in a short period. Off-site monitoring can help 
target examination reviews towards emerging risks at a particular 
FHLBank or across the System.

In reviewing advance pricing term compliance, FHFB examiners are 
responsible for determining whether the FHLBanks price their advances 
above the cost of issuing debt, the FHLBank's member products policy 
clearly outlines the standards and criteria for differential pricing, 
and the FHLBanks apply these standards and criteria consistently and 
without discrimination to all members. In reviewing collateral 
compliance, FHFB examination teams look at the policies the FHLBanks 
use to conduct their collateral verification site visits and the 
agreements they use to perfect their liens. FHFB examiners also review 
the procedures that the FHLBanks have established to ensure that they 
value their members' collateral frequently so that it is in line with 
the haircuts that they apply.

FHFB did not identify significant problems in the FHLBanks' advance 
term pricing practices in examinations completed in 2001 and 2002. FHFB 
officials said that their examinations have generally concluded that 
the FHLBanks comply with collateral requirements and setting advance 
interest rates. FHFB examinations completed between 2001 and 2002 that 
we reviewed identified no serious deficiencies.[Footnote 27] According to FHFB 
examination criteria, a "violation" represents a significant deficiency 
at a FHLBank while a recommendation is less serious. With the exception 
of one violation for failure to perform advance collateral 
verification, FHFB examinations regarding collateral contained only 
recommendations that FHLBanks develop or expand policies. Similarly, 
according to the FHFB officials, the agency has only recommended that 
certain FHLBanks describe more clearly their policies on differential 
advance term pricing.

FHFB's FHLBank System Safety and Soundness Data Reporting Procedures 
Have Limitations:

Although FHFB has collected collateral data from the FHLBanks since 
2000 that are intended to assist in monitoring the FHLBanks' safety and 
soundness, the data have questionable value in their current format. On 
an annual basis, FHFB has requested that the FHLBanks provide data on 
the level of collateral securing advances. FHFB requests data on, among 
other things, the total value of collateral securing advances, 
collateralization by member type (such as commercial bank and thrifts), 
collateralization by member size (such as members with $10 billion or 
more in assets), and the use of eligible collateral by member 
institutions (such as the use of single-family mortgages and small 
business and agricultural CFI collateral). According to the FHFB's 2003 
request letter, these data are "very valuable in exhibiting the 
System's safety and soundness and the extent to which traditional types 
of collateral secure advances." Additionally, FHFB stated in the letter 
that the information would help FHFB ascertain the acceptance and 
placement of small business and agricultural collateral by CFIs. 

Although FHFB has identified such data as useful for assessing the 
FHLBank System's safety and soundness, we found that FHLBanks do not 
have clear information on how FHFB wants the data to be reported. 
Several FHLBanks that we visited report specific collateral--such as 
individual single-family mortgages or CFI loans--that has been pledged 
by their members to support outstanding advances. Officials at these 
FHLBanks said that they had provided the data in the format requested 
by FHFB. In contrast, other FHLBank officials told us that they 
reported all of the eligible collateral on the books of their members. 
A senior official from one of these FHLBanks said that since the bank 
has access to all the eligible collateral with whom it has blanket lien 
agreements, there was no need to report more specific loan-level data 
to FHFB. Officials from one FHLBank said that FHFB provided only 
general guidance on what collateral data to report, which required each 
FHLBank to develop its own reporting criteria.

Table 9 illustrates the differing approaches that the FHLBanks use to 
report collateral data to FHFB. The table shows the total advances 
outstanding, the reported collateral securing those advances, and the 
ratio of collateral to advances at each FHLBank as of December 31, 
2002. The ratios at FHLBanks B and K show that their collateral to 
advance ratios are 1.23 to 1 and 1.26 to 1, respectively. These 
FHLBanks report to FHFB individual collateral securing advances. In 
contrast, FHLB E's ratio of 7.15 to 1 is explained by the fact that the 
bank reports to FHLBank the value of all the eligible collateral held 
by its members.

Table 9: FHFB Data on Collateralization and Advances as of December 31, 
2002:

Dollars in millions.

Bank A; Total collateral: $62,497; Total advances: $24,027; 
Collateralization ratio: 2.60.

Bank B; Total collateral: $30,297; Total advances: $24,651; 
Collateralization ratio: 1.23.

Bank C; Total collateral: $81,210; Total advances: $27,490; 
Collateralization ratio: 2.95.

Bank D; Total collateral: $158,553; Total advances: $77,205; 
Collateralization ratio: 2.05.

Bank E; Total collateral: $196,007; Total advances: $27,428; 
Collateralization ratio: 7.15.

Bank F; Total collateral: $77,510; Total advances: $25,991; 
Collateralization ratio: 2.98.

Bank G; Total collateral: $152,840; Total advances: $80,252; 
Collateralization ratio: 1.90.

Bank H; Total collateral: $62,294; Total advances: $23,044; 
Collateralization ratio: 2.70.

Bank I; Total collateral: $117,248; Total advances: $38,237; 
Collateralization ratio: 3.07.

Bank J; Total collateral: $113,604; Total advances: $66,017; 
Collateralization ratio: 1.72.

Bank K; Total collateral: $46,010; Total advances: $36,488; 
Collateralization ratio: 1.26.

Bank L; Total collateral: $55,041; Total advances: $19,686; 
Collateralization ratio: 2.80.

Source: FHFB. 

Note: The A-L listing of the FHLBanks in this table differs from the A-
L listing in other tables in this report.

[End of table]

Because certain FHLBanks may report all of the eligible collateral held 
by their members, the data that FHFB receives on the acceptance and 
placement of CFI collateral--one of FHFB's stated reasons for 
collecting the data---is difficult to assess. As of December 31, 2002, 
the FHLBanks reported to FHFB that there was $7.2 billon in small 
business and agricultural loans securing advances by CFIs. Of that $7.2 
billion figure, $3.6 billion--or approximately 50 percent--was reported 
by one FHLBank, which reported the value of all the collateral on its 
members' books. This FHLBank reported the highest value of CFI 
collateral in the FHLBank System. However, an official from this 
FHLBank said that a small number of its members secured advances with 
CFI collateral and estimated that the total amount of such advances was 
$25 million.

The Director of FHFB's Office of Supervison said that the agency 
planned to review its current collateral data collection and reporting 
procedures for the FHLBanks. The Director said that the collateral data 
are currently used to complement FHFB's safety and soundness 
supervision program and that the data provided a broad overview of 
trends and anomalies. However, the Director also said that the 
collateral data did not substitute for FHFB's annual examinations at 
each FHLBank, which we discussed earlier. Although the FHLBank 
collateral data may provide some benefits for FHFB's examination 
program, FHFB's decision to review current reporting procedures appears 
to be appropriate. The current data do not allow for meaningful 
comparisons across the FHLBank System and the reported data on the 
placement of CFI collateral are potentially misleading. With better 
collateral data, FHFB's ability to monitor the FHLBank System's safety 
and soundness could be enhanced.

FHFB's oversight of the FHLBank System could also be enhanced by 
reviewing the extent to which competition may currently take place 
between FHLBanks and its potential effects on the System's safety and 
soundness. Available evidence suggests that competition may take place 
between the FHLBanks, including (1) key differences in advance term 
pricing across the FHLBank System, (2) statements by some FHLBank 
officials that holding company subsidiaries may play one FHLBank 
against another to obtain more favorable advance rates, and (3) the 
legal authority of holding company subsidiaries to transfer assets 
between one another thereby creating the potential that collateral may 
be moved from one subsidiary to another to obtain more favorable 
advance rates. Although there is evidence that competition between the 
FHLBanks takes place, the evidence is largely anecdotal and has not 
been quantified. Given FHFB's oversight responsibilities for the 
FHLBank System, it could benefit by collecting data necessary to better 
understand the degree of competition within the System. For example, 
FHFB could collect data on the advance terms---including interest 
rates---that the subsidiaries of holding companies obtain on advances 
and whether the eligible collateral at each subsidiary has fluctuated 
over time. By collecting such data, FHFB could identify the potential 
effects that holding company subsidiaries have on competition between 
the FHLBanks and whether such competition in any way has affected the 
FHLBanks' underwriting standards. Additionally, such data could assist 
FHFB in assessing the potential competitive and safety and soundness 
implications of multidistrict membership.

Conclusions:

Within the framework established by statute and regulation, the 
FHLBanks have independent authority to set advance pricing terms that 
meet their business needs and the needs of their members. As a result, 
advance pricing terms vary across the FHLBank System as evidenced by 
sometimes differing interest rates, tiered-pricing programs, 
collateral requirements, borrowing limits, and advance activity capital 
requirements. Because many holding companies have multiple 
subsidiaries, each of which may be eligible for membership in a 
different FHLBank, they have the opportunity to obtain advances from 
those FHLBanks that offer the most advantageous terms. Under exemptions 
to Sections 23A and 23B of the Federal Reserve Act, moreover, the 
potential also exists that holding companies can transfer assets from 
one subsidiary to another to obtain favorable advance pricing. These 
conditions create the potential for competition on advance pricing 
among the FHLBanks and any such pressures may be enhanced under 
multidistrict membership.

FHFB has a critical responsibility in helping to ensure that the 
FHLBanks sometimes differing advance pricing terms are conducted within 
statutory and regulatory requirements. In particular, FHFB is 
responsible for ensuring that the FHLBanks do not price advances below 
the cost of funds and fully secure advances with eligible forms of 
collateral. Although FHFB has not identified any serious violations in 
advance pricing terms in recent years, the agency has an important 
responsibility to ensure that any competitive pressures do not threaten 
the FHLBank System's safety and soundness. However, the data that FHFB 
currently collects on collateral from the FHLBanks is of questionable 
value in their current format for understanding the System's safety and 
soundness. Moreover, FHFB does not collect data that could be helpful 
in assessing the competitive implications of holding companies whose 
subsidiaries operate in different FHLBank districts as well as 
multidistrict membership.

Recommendations: 

To strengthen FHFB's safety and soundness oversight, we recommend that 
FHFB review its current collateral reporting requirements and work with 
the FHLBanks to obtain data that are useful in understanding collateral 
practices within the System. We also recommend that FHFB work with the 
FHLBanks to obtain data necessary to understand the competitive and 
safety and soundness implications of holding companies whose 
subsidiaries operate in different FHLBank districts as well as 
multidistrict membership. 

Agency Comments and Our Evaluation:

We received written comments on a draft of this report from FHFB and 
the Federal Home Loan Bank President's Conference, which are reprinted 
in appendixes III and IV, respectively. We also received technical 
comments from FHFB, several FHLBanks, and the Board of Governors of the 
Federal Reserve, which have been incorporated into the report where 
appropriate. 

FHFB agreed to implement the recommendations contained in the report. 
FHFB stated that while the collateral data discussed in the report were 
used during the examination process, the data did not substitute for 
annual examinations. FHFB stated that it planned to examine the 
effectiveness of the collateral policies and procedures at each FHLBank 
and to identify practices, possibly to include enhanced data collection 
and reporting, to further the use of the most effective collateral 
practices. FHFB also stated that it planned to work with the FHLBanks 
to assess the value of additional data collection and reporting to 
monitor the competitive and safety and soundness influences of holding 
company subsidiaries that operate in multiple FHLBank districts. FHFB 
stated that its examinations have found that advance term pricing 
differed among the FHLBanks for many reasons, including the trade-offs 
between dividends and advance rates and competitive pressures. FHFB 
stated that it would be worthwhile to examine the extent to which 
competition--both between the FHLBanks and from the capital markets--
can be a healthy influence on the efficient operation of the FHLBanks.

The FHLBank President's Conference stated that the report correctly 
noted that the advance pricing and collateral practices of the 12 
FHLBanks differ. The Conference stated that the FHLBank Act and FHFB 
regulations establish a framework in which individual FHLBanks can 
establish policies that meet the needs of their member institutions. 
The Conference also stated that statutory and regulatory provisions 
that require advance interest rates to be set above borrowing costs and 
advances to be secured by eligible collateral ensure that the FHLBanks 
operate in a safe and sound manner. The Conference also stated that its 
members were prepared to work with FHFB to collect data necessary to 
understand the collateral practices across the FHLBanks.

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies of this report 
to the Chairman of the Senate Committee on Banking, Housing, and Urban 
Affairs; and the Ranking Member of the Subcommittee on Capital Markets, 
Insurance, and Government Sponsored Enterprises of the House Committee 
on Financial Services. We will also send copies to FHFB, the FHLBank 
President's Conference, the FHLBanks, and the Board of Governors of the 
Federal Reserve. We will also send copies to others upon request. In 
addition, this report will be available at no charge on GAO's Web site 
at http://www.gao.gov. Please contact Mr. Wesley M. Phillips or me at 
(202) 512-8678, or email (phillipsw@gao.gov or shearw@gao.gov) if you 
or your staff have any questions concerning this report. GAO staff who 
made major contributions to this report are listed in appendix V.

Signed by: 

William B. Shear 

Director, Financial Markets and Community Investment: 

[End of section]

Appendixes: 

Appendix I: Objectives, Scope, and Methodology:

As discussed with your staff, our report objectives are to (1) describe 
the laws and regulations pertaining to the terms that FHLBanks can 
offer on advances; (2) provide information on whether key differences 
exist in current advance pricing and other terms across the FHLBanks; 
(3) determine whether holding companies face any legal or regulatory 
barriers in transferring assets among subsidiaries who are members of 
different FHLBank districts; and (4) describe FHFB's safety and 
soundness oversight of the FHLBanks' advance pricing practices and 
review selected data that FHFB collects to monitor the safety and 
soundness of the FHLBank System.

To meet objective (1), we reviewed the Federal Home Loan Bank Act as 
amended. We also reviewed the FHFB regulations that govern or describe 
the terms that FHLBanks can offer on advances. We interviewed FHFB and 
FHLBank officials to obtain their views on the terms FHLBanks can offer 
on advances. 

To meet objective (2), we interviewed FHFB, the 12 FHLBank presidents, 
credit staff from 7 of the 12 FHLBanks, and we sent a structured 
questionnaire to each of the 12 FHLBanks and received responses from 
each of the banks. Additionally, we reviewed the credit policies of 
each of the 12 FHLBanks and reviewed data on advance interest rates for 
those FHLBanks that post such data on their Web sites. We note that the 
data posted on the FHLBank Web sites are subject to change and that the 
actual rates members actually pay may differ due to advance term 
negotiations between FHLBanks and their members. Two other FHLBanks 
separately provided their advance rates for the dates that we used. 
With this information, we compared advance pricing and other terms 
across the FHLBanks to identify key differences. The scope of our work 
did not involve developing a methodology to determine why individual 
FHLBanks charge the advance interest rates or other advance pricing 
terms that they do. 

To meet objective (3), we reviewed applicable laws and regulations 
regarding the transfer of funds and assets among holding companies and 
their subsidiaries, including the Federal Reserve Act, Federal Home 
Loan Bank Act, Home Owners' Loan Act, FHFB regulations, and Federal 
Reserve Board regulations. We also interviewed representatives from the 
Federal Reserve Board, FHFB and a large holding company.

To meet objective (4), we interviewed FHFB officials, reviewed FHFB's 
advance pricing examination guidelines, and reviewed selected 
examination reports for 2001 and 2002 related to advance pricing and 
collateral requirements. We did not evaluate the effectiveness of 
FHFB's examination program. To assess FHFB's collateral data reporting 
process, we reviewed FHFB's data request forms and the data provided by 
the FHLBanks. We also interviewed officials at selected FHLBanks to 
determine their approach to reporting the collateral and other data and 
we interviewed FHFB officials on these issues.

We conducted our review from January to September 2003 in Washington, 
D.C; New York, New York; Topeka, Kansas; Dallas, Texas; Atlanta, 
Georgia; and Pittsburgh, Pennsylvania, and Indianapolis, Indiana, in 
accordance with generally accepted government auditing standards. 

[End of section]

Appendix II: Advance Interest Rates Charged by Specific FHLBanks on 
Selected Dates:

Table 10: Comparison of Selected FHLBank Interest Rates on Fixed Rate 
Advances (July 18, 2003)A:

Term: 12 mo; Bank A: 1.29; Bank B: 1.20; Bank C: 1.54; Bank D: 1.53; 
Bank E: 1.22; Bank F: 1.41; Bank G: 1.45; Bank H: 1.23; Bank I: 1.34; 
Bank J: 1.43; Bank K: 1.38; Range: 1.20-1.54; Difference in basis 
points: 34.

Term: 24 mo; Bank A: 1.77; Bank B: 1.68; Bank C: 1.95; Bank D: 1.95; 
Bank E: 1.74; Bank F: 1.84; Bank G: 1.98; Bank H: 1.76; Bank I: 1.86; 
Bank J: 1.84; Bank K: 1.96; Range: 1.68-1.98; Difference in basis 
points: 30.

Term: 36 mo; Bank A: 2.31; Bank B: 2.28; Bank C: 2.5; Bank D: 2.48; 
Bank E: 2.32; Bank F: 2.42; Bank G: 2.51; Bank H: 2.31; Bank I: 2.46; 
Bank J: 2.48; Bank K: 2.5; Range: 2.28-2.51; Difference in basis 
points: 23.

Term: 48 mo; Bank A: 2.83; Bank B: 2.80; Bank C: 3.12; Bank D: 3.00; 
Bank E: 2.93; Bank F: 2.92; Bank G: 3.09; Bank H: 2.84; Bank I: 2.98; 
Bank J: 3.01; Bank K: 3.04; Range: 2.80-3.12; Difference in basis 
points: 32.

Term: 60 mo; Bank A: 3.27; Bank B: 3.22; Bank C: 3.4; Bank D: 3.43; 
Bank E: 3.34; Bank F: 3.34; Bank G: 3.48; Bank H: 3.28; Bank I: 3.39; 
Bank J: 3.45; Bank K: 3.46; Range: 3.22-3.48; Difference in basis 
points: 26.

Source: Selected FHLBanks.

Note: The A-K listing of the FHLBanks for this table differs from the 
alphabetic listings in other tables in this report.

[A] The interest rates shown are generally for regular fixed term and 
rate advances with no discounting. The FHLBanks also differ in their 
policies regarding payment frequency and daycount accrual methods. No 
attempt is made here to harmonize the data to a single payment 
frequency and daycount accrual standard. 

[End of table]

Table 11: Comparison of Selected FHLBank Interest Rates on Fixed Rate 
Advances (July 25, 2003)A:

Term: 12 mo; Bank A: 1.26; Bank B: 1.56; Bank C: 1.36; Bank D: 1.45; 
Bank E: 1.55; Bank F: 1.40; Bank G: 1.40; Bank H: 1.21; Bank I: 1.30; 
Bank J: 1.44; Bank K: 1.24; Range: 1.21-1.56; Difference in basis 
points: 35.

Term: 24 mo; Bank A: 1.78; Bank B: 1.97; Bank C: 1.85; Bank D: 1.96; 
Bank E: 1.96; Bank F: 1.94; Bank G: 1.84; Bank H: 1.73; Bank I: 1.80; 
Bank J: 1.84; Bank K: 1.78; Range: 1.73 -1.97; Difference in basis 
points: 24.

Term: 36 mo; Bank A: 2.35; Bank B: 2.57; Bank C: 2.52; Bank D: 2.61; 
Bank E: 2.43; Bank F: 2.58; Bank G: 2.50; Bank H: 2.39; Bank I: 2.41; 
Bank J: 2.54; Bank K: 2.39; Range: 2.35-2.61; Difference in basis 
points: 26.

Term: 48 mo; Bank A: 3.02; Bank B: 3.15; Bank C: 3.12; Bank D: 3.24; 
Bank E: 3.18; Bank F: 3.18; Bank G: 3.06; Bank H: 2.99; Bank I: 3.01; 
Bank J: 3.15; Bank K: 2.99; Range: 2.99-3.24; Difference in basis 
points: 25.

Term: 60 mo; Bank A: 3.48; Bank B: 3.64; Bank C: 3.61; Bank D: 3.69; 
Bank E: 3.54; Bank F: 3.66; Bank G: 3.51; Bank H: 3.46; Bank I: 3.49; 
Bank J: 3.65; Bank K: 3.47; Range: 3.46-3.69; Difference in basis 
points: 23.

Source: Selected FHLBanks.

Note: The A-K listing of the FHLBanks for this table differs from the 
alphabetic listings in other tables in this report.

[A] The interest rates shown are generally for regular fixed term and 
rate advances with no discounting. The FHLBanks also differ in their 
policies regarding payment frequency and daycount accrual methods. No 
attempt is made here to harmonize the data to a single payment 
frequency and daycount accrual standard.

[End of table]

[End of section]

Appendix III: Comments from the Federal Housing Finance Board:

Federal Housing Finance Board 
1777 F Street, N.W., Washington, D.C. 20006 
Telephone: (202) 408-2500 
Facsimile: (202) 408-1435 
www.fhfb.gov:

August 27, 2003:

Mr. Thomas J. McCool Managing Director Financial Markets and Community 
Investment U. S. General Accounting Office Washington, DC 20548:

Dear Mr. McCool:

This letter represents the response of the Federal Housing Finance 
Board (the "Finance Board") to the General Accounting Office's draft 
report, "Key Loan Pricing Terms Can Differ Significantly" (the "Draft 
Report"). The Draft Report makes two recommendations regarding 
collateral reporting requirements and the collection of data on holding 
companies. We appreciate your recommendations and will carefully 
consider how to improve data collection in those areas. In addition, we 
have a few specific comments on your two recommendations, which 
supplement the technical comments we provided orally to your 
representatives during a meeting on August 20, 2003.

First, the Draft Report observes that there is some confusion among the 
FHLBanks regarding data on collateral securing advances that they must 
report to the Finance Board. The Draft Report recommends, therefore, 
that the Finance Board review the effectiveness of its current 
collateral data collection program and obtain additional data that 
would be useful in assessing collateral practices within the system. In 
response to your recommendation, we intend to further examine the 
effectiveness of the collateral policies and procedures at each of the 
FHLBanks and to identify practices, possibly to include enhanced data 
collection or reporting, to further the use of the most effective 
collateral policies and procedures at each of the FHLBanks.

We currently use the collateral data collection instrument referred to 
in the Draft Report to complement our safety and soundness supervision. 
The data provide a broad view of trends and anomalies. However, such 
data do not substitute for a thorough 
review of collateral practices conducted by Finance Board examination 
staff. Our examiners conduct such reviews by assessing each FHLBank's 
collateral policies and procedures and reviewing the FHLBank's 
practices in monitoring its own compliance with those policies and 
procedures. More specifically, our examiners review data on 
collateral delinquencies, credit ratings, and delivery status, and 
monitor the frequency of on-site reviews of members' collateral by 
FHLBank staff.

Second, the Draft Report recommends that the Finance Board work with 
the FHLBanks to collect data, such as on the differences in advance 
pricing by FHLBanks, that are necessary to monitor the competitive and 
safety and soundness implications of holding companies whose 
subsidiaries operate in multiple FHLBank districts. In response to your 
recommendation, we will work with the FHLBanks to assess the value of 
additional data collection and reporting to monitor the competitive and 
safety and soundness influence of holding companies whose members 
operate in multiple FHLBank districts, taking into account the possible 
effect on advance pricing of outside, as well as inside, competitive 
influences on the FHLBanks.

Finance Board examiners currently review FHLBank advance pricing 
policies, assess their consistency with the FHLBank's profit or net 
income goals, and check for compliance with statutory and regulatory 
requirements that pricing be both above cost and non-discriminatory 
among members. On the basis of those examinations, we have found that 
advance prices among the FHLBanks differ for many reasons, including 
decisions made by the cooperative members of each FHLBank as to their 
preferences with respect to the trade-offs between advance pricing and 
dividends. We have also observed that competitive pressures from 
capital markets generally can and do influence the advance prices 
charged by individual FHLBanks. As such, an area worthy of inquiry is 
the extent to which competition, both among the FHLBanks and between 
the FHLBanks and other capital market entities, can be a healthy 
influence on the efficient operation of the FHLBanks.

We appreciate the issues raised in the Draft Report and the opportunity 
to respond to your analysis, both by this letter and in our previous 
discussions with your staff. Thank you again for the high-quality 
professional effort of your team.

Stephen M. Cross 
Director:
Office of Supervision:

Signed by Stephen M. Cross: 

[End of section]

Appendix IV: Comments from the Federal Home Loan Bank Presidents' 
Conference:

FHLBBoston

MICHAEL A. JESSEE President and Chief Executive Officer:

michael.jessee@fhlbboston.com:

August 27, 2003:

Wesley Phillips Assistant Director U.S. General Accounting Office 
Washington, DC 20548:

Dear Mr. Phillips:

On behalf of the Federal Home Loan Bank Presidents' Conference, I am 
pleased to submit this comment letter on the report entitled Federal 
Home Loan Bank System: Key Loan Pricing Terms Can Differ Significantly 
(GAO-03-973).

Several of the Federal Home Loan Banks (FHLBanks) have already provided 
the General Accounting Office (GAO) with technical comments on the 
draft. The intent of this letter is to address the general nature of 
the report.

The report correctly notes that advances-pricing and collateral 
practices differ among the 12 FHLBanks. The FHLBank Act and Federal 
Housing Finance Board (FHFB) regulations establish a framework within 
which the board of directors of an FHLBank can approve an advances-
pricing policy that best satisfies the needs of that FHLBank's member 
institutions. Statutory and regulatory provisions require that advances 
rates be set above all-in borrowing costs and that advances be fully 
secured by eligible collateral. Thus, each FHLBank makes advances in a 
safe and sound manner while meeting the needs of its member 
institutions and the communities they serve.

The FHLBanks are prepared to work with the FHFB should it decide to 
expand its data collection to better understand the collateral 
practices across the 12 FHLBanks.

Sincerely,

Michael A. Jessee:

Chairman, Research and Planning Committee Federal Home Loan Bank 
Presidents' Conference:

Signed by Michael A. Jessee:

[End of section]

Appendix V: GAO Acknowledgments and Staff Contacts:

GAO Contacts:

William B. Shear (202) 512-8678 Wesley M. Phillips (202) 512-5660:

Acknowledgments:

In addition to the individuals named above, Tanya Cruz, Crystal 
Daniels, Rachel DeMarcus, M'Baye Diagne, Marc Molino, Andy Pauline, 
Mitchell B. Rachlis, and Barbara Roesmann made key contributions to 
this report.

(250114):

FOOTNOTES

[1] Commercial banks, which may be owned by bank holding companies, 
were not allowed to join the FHLBank System until 1989.

[2] Joint and several liability means that, with respect to 
consolidated obligations, each FHLBank is responsible for its own debt 
obligations as well as the debt obligations of the other FHLBanks in 
the System. If one FHLBank experienced financial problems, and was 
unable to satisfy its repayment obligations, the other FHLBanks would 
be responsible for honoring them. 

[3] Bank or thrift holding companies may establish separately chartered 
subsidiaries in two or more FHLBank districts. Under one concept of 
multidistrict membership, financial organizations--such as banks or 
thrifts--would be able to join multiple FHLBank districts without 
establishing separately chartered institutions. 

[4] Residential mortgages include single-family mortgages--defined as 
mortgages financing properties with 1-4 residential units--and 
multifamily mortgages. ORERC includes home equity loans and commercial 
real estate loans. Currently, CFIs are insured depository institutions 
with assets that do not exceed $538 million. The asset size limit is 
adjusted annually for inflation and is based on a 3-year average of 
each institution's total assets.

[5] Haircuts refer to the discounts that the FHLBanks apply to 
collateral that is pledged to secure advances. For example if the 
FHLBank has a 40 percent haircut for single-family mortgage loans, a 
member bank could borrow up to 60 percent of the value of the single-
family mortgage loans that it pledged as collateral. 

[6] Most members of the FHLBank System are separately chartered 
commercial banks or thrifts, which are insured by the Federal Deposit 
Insurance Corporation.

[7] Among other requirements, Section 23A imposes quantitative limits 
on covered transactions; for example, an insured bank's covered 
transactions with any single affiliate cannot exceed 10 percent of the 
bank's capital stock and surplus, and transactions with all affiliates 
combined cannot exceed 20 percent. Section 23B requires that certain 
transactions between insured banks and thrifts and uninsured affiliates 
take place on market terms. 

[8] The exemption under 23A applies if the holding company owns or 
controls 80 percent or more of the voting securities of both insured 
institutions or if one insured institution owns or controls 80 percent 
of the voting securities of the other. Under 23B, transactions between 
a bank and a nonbank affiliate are restricted. 

[9] Bank regulators, such as FDIC, impose capital requirements that 
apply to the insured subsidiaries of bank or thrift holding companies. 
In addition, each member of an FHLBank must purchase capital stock in 
that FHLBank. We do not address the potential application of state law 
to transfers of assets.

[10] Off-site monitoring involves FHFB headquarters staff reviewing 
financial data on the FHLBanks on a continual basis. Off-site 
monitoring can serve as an effective supplement to the annual 
examination process by, for example, identifying rapid changes in 
FHLBank financial risks and serving to assist examiners in planning 
examinations.

[11] "Mortgage Partnership Finance" and "MPF" are registered trademarks 
of the FHLBank of Chicago.

[12] Conventional mortgages do not have federal insurance or 
guarantees. FHLBank acquired mortgages are below the conforming 
mortgage loan limit, which is currently $322,700 for single-family 
properties. Fannie Mae and Freddie Mac, the other two housing GSEs, 
also purchase conventional conforming mortgages and issue mortgage 
backed securities.

[13] The FHLBank of Dallas requested that the WAMU thrift subsidiary 
belong to both the San Francisco and Dallas districts. FHLBank Dallas 
interpreted the phrase in the FHLBank Act stating that a member can 
join the district where it is headquartered or an adjoining district if 
demanded by convenience as meaning the WAMU subsidiary could join both 
districts without establishing a separately chartered subsidiary in 
Dallas. Traditionally, the phrase has been understood to mean a FHLBank 
member can join either the district where it is headquartered or the 
adjoining district, but not both.

[14] A member, FHLBank, or the Office of Finance may file a request to 
intervene in the consideration of the petition, in support or against, 
if it believes its rights may be affected. These requests must include 
a statement of the facts, a description of the relief requested, and be 
filed with the Secretary to the Federal Housing Finance Board within 45 
days from the date the petition is filed.

[15] Section 7(j) of the FHLBank Act (12 U.S.C. 1427(j)) requires that 
each Bank's board of directors administer the affairs of the Bank 
"fairly and impartially and without discrimination in favor of or 
against a member," and section 9 of the FHLBank Act (12 U.S.C. 1429) 
provides that a Bank "may at its discretion deny any such application 
(for an advance) or may grant it on such conditions as the (Bank) may 
prescribe."

[16] 12 C.F.R. 950.5(b)(1).

[17] According to the preamble to the final rule on advances, published 
May 20, 1993, 58 FR 29456, the Board concluded that the extension of 
credit to FHLBank members based on the member's creditworthiness, or 
other reasonable criteria applied equally to all members, does not 
constitute "discrimination" under 7(j) of the FHLBank Act. The Board 
also approved risk based pricing, stating, "risk based pricing of 
advances should enhance the fairness of the Banks' credit programs, 
since the terms of advances to more creditworthy members should be more 
favorable than those to members posing a greater credit risk to a 
Bank." In addition, the Board approved of differential pricing of 
advances based upon criteria other than risk, subject to the 
application of consistent standards to all borrowing members. The 
preamble cited the fact that "certain Banks have offered 'volume 
discounts' to members who finance a certain percentage of their total 
assets with Bank advances," as an example of allowable differential 
pricing. 1993 WL 167293 (F.R.)

[18] Single-family mortgages are mortgages on dwellings that include 
condominiums, planned unit developments, townhomes, and qualified 
mobile homes affixed to the land. The FHLBanks typically prefer that 
these mortgages are on owner-occupied dwellings. 

[19] Many FHLBanks also have several non financial triggers that 
require specific listing or delivery of assets that are pledged as 
collateral. 

[20] Total FHLBank System operating expenses of $396 million are very 
small compared to other expenses, such as interest expenses, which 
totaled nearly $18 billion in 2002.

[21] A repurchase agreement, commonly referred to as a "repo," is a 
transaction in which a dealer in effect borrows money by selling 
securities and simultaneously agreeing to buy them back at a higher 
price at a later time.

[22] These activity based capital requirements are in addition to 
minimum membership requirements for being a member of a FHLBank. Each 
FHLBank requires its members to invest capital based on the amount of 
advances they have outstanding. FHLBank boards of directors typically 
set ranges of capital to advances ratios. FHLBank boards of directors 
also typically set specific ratios within the range that members are 
required to meet when taking out advances. Members must comply with the 
activity-based requirement as long as the relevant activity remains 
outstanding, including periods beyond the termination of the member's 
membership in a FHLBank. The advances investment requirements are 
calculated daily and each time a member enters into a new advances 
transaction. 

[23] 12 U.S.C. 371c, 12 U.S.C. 371c-1 and 12 C.F.R. Part 223. Section 
11(a)(1) of the Home Owners' Loan Act, 12 U.S.C. 1468(a)(1), generally 
applies sections 23A and 23B of the Federal Reserve Act to every 
savings association in the same manner and to the same extent as if the 
savings association were a member bank of the Federal Reserve System. 
The Office of Thrift Supervision has issued proposed regulations on 
transactions with affiliates that reflect Regulation W.

[24] A "covered transaction" is defined as a loan or extension of 
credit to an affiliate, the purchase of or investment in securities 
issued by an affiliate, the purchase of assets from an affiliate, 
acceptance of securities issued by an affiliate as collateral security 
for a loan or extension of credit, issuance of a guarantee, acceptance, 
or a letter of credit on behalf of an affiliate.

[25] A Federal Reserve official stated that the Federal Reserve would 
interpret safe and sound banking practices to include that sales of 
assets between subsidiaries be conducted on market terms. 

[26] Banking regulators, such as FDIC, require insured depository 
institutions to meet leverage and risk-based capital requirements.

[27] An FHFB official provided us with copies of all examination 
reports for 2001 and 2002 that noted any findings related to collateral 
management practices. 

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