During 2003, FHFB staff, at the direction of the agency’s chairman,  analyzed the benefits and costs associated with multidistrict membership. 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. For example, officials at one FHLBank said that its  representatives had the authority to negotiate the stated advance interest  rates. 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). 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. 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. 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). 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. 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. 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. 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. GAO staff who made  major contributions to this report are listed in appendix V.

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.
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 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.