Federal Housing Finance Board

Annual Performance Budget 

Fiscal Year 2008 

November 14, 2007 
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TABLE OF CONTENTS 

MESSAGE FROM THE CHAIRMAN............................................................ Page 1

MISSION,VISION,AND VALUES................................................................................ 2

THE FEDERAL HOME LOAN BANK SYSTEM........................................................ 3

THE FEDERAL HOUSING FINANCE BOARD........................................................ 5

SUPERVISION OF THE FEDERAL HOME LOAN BANKS............................................... 7

PRIORITIES, RESOURCES, AND PERFORMANCE MEASURES ....................................... 8

ALLOCATING RESOURCES TO MEET OUR GOALS................................................. 11

MEANS AND STRATEGIES TO MEET OUR GOALS.................................................. 12

THE YEAR AHEAD...................................................................................... 14

PERFORMANCE MEASUREMENT: ASSESSING OUR PROGRESS.................................. 18
MESSAGE FROM THE CHAIRMAN 

I am pleased to present the Federal Housing Finance Board’s (Finance Board) Annual 

Performance Budget for fiscal year 2008 (FY2008). This Performance Budget is the 

blueprint for implementing the Finance Board’s Strategic Plan for the coming fiscal year. It 

identifies specific performance goals and measures together with means and strategies that 

will allow the Finance Board to achieve the goals and outcomes articulated in its Strategic 

Plan. 

In 2006, the Finance Board adopted a Strategic Plan for fiscal years 2007-2012. This Plan 

includes two goals that drive the Finance Board’s activities and operations. These goals are: 

(1) the Federal Home Loan Banks (FHLBanks) operate safely and soundly; and (2) the 

affordable housing and community investment programs of the FHLBanks operate 

effectively and efficiently. In FY 2008, the Finance Board will achieve these goals by 

allocating resources to carry out the safety and soundness and affordable housing and 

community investment examination and supervision programs. The Finance Board will 

emphasize the following: 

• Expanding risk-focused supervision and examination through refinements to our 

risk rating system and the collaborative development of supervisory strategies. 

• Enhancing our affordable housing and community investment examinations 

through increased focus on program evaluation and improved quality control 

processes. 

• Developing policies, guidance, and regulations, as appropriate, to reflect recent 

developments in financial accounting and disclosure, capital management, risk 

management, and mortgage markets, including the markets for mortgage backed 

securities. 

• Continuing to enhance our agency’s data systems, risk monitoring, and risk 

modeling capabilities. 

We remain committed to fulfilling our mission of ensuring the safety and soundness of the 

FHLBanks so they can continue to serve as reliable sources of liquidity and housing finance 

for their members and the American public. 

Ronald A. Rosenfeld 

Chairman 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 1
MISSION, VISION, AND VALUES 

THE MISSION OF THE FEDERAL HOUSING FINANCE BOARD

The Finance Board’s mission is to ensure that the FHLBanks are safe and sound so they can 

serve as a reliable source of liquidity and funding for the nation’s housing finance and 

community investment needs. 

OUR VISION

To maintain the public’s trust, the Finance Board is dedicated to the highest professional 

standards of accountability and independence in carrying out its responsibilities for FHLBank 

supervision and oversight. 

OUR VALUES

The core values underlying the mission and vision of the Finance Board, which guide its 

organizational decisions and actions, are: 

• Independence. The Finance Board is the arm’s-length regulator of the FHLBanks 

and the Office of Finance. 

• Accountability. The Finance Board is a steward of the public’s trust and will use its 

resources efficiently and in the public interest. 

• Responsiveness. The Finance Board aligns its actions with its mission and responds 

promptly and effectively to emerging risks and opportunities in the financial system. 

• Integrity. The Finance Board discharges its responsibilities fairly and adheres to the 

highest standards of ethical conduct. 

• Excellence. The Finance Board strives for excellence in carrying out its 

responsibilities and recognizes the contributions of employees who demonstrate the 

highest professional standards in their work. 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 2
THE FEDERAL HOME LOAN BANK SYSTEM

In 1932, Congress authorized the establishment of the FHLBanks to stimulate mortgage 

finance and provide liquidity to credit markets. Until 1989, FHLBank members consisted 

primarily of savings and loan associations engaged in home financing. In 1989, Congress 

extended eligibility for FHLBank membership to commercial banks and federally insured credit 

unions (subject to a home financing requirement). In 1999, Congress made FHLBank 

membership voluntary for all types of eligible institutions. 

FEDERAL HOME LOAN BANK DISTRICTS

The FHLBanks are privately capitalized, government-sponsored enterprises that provide 

wholesale credit to members and certain nonmembers to be used for mortgage lending and 

related activities. In addition, the FHLBanks have a mandate to promote housing and 

community investment finance. The FHLBanks provide long-term, flexible financing to 

more than 8,100 member financial institutions around the country. As of September 30, 

2007, the FHLBanks had combined assets exceeding $1.2 trillion dollars. 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 3
The FHLBanks are funded principally by the issuance of consolidated obligations of the 

FHLBank System. These consolidated obligations consist of bonds (with original maturities of 

one year or longer) and discount notes (with original maturities of less than one year). 

Consolidated obligations are not guaranteed or insured by the U.S. government. However, 

their status as government-sponsored enterprises enables the FHLBanks to raise funds at rates 

slightly higher than comparable obligations issued by the U.S. Treasury. Debt issued by the 

FHLBanks through the Office of Finance is the joint and several obligations of all 12 

FHLBanks. 

Members use short and long-term advances (collateralized loans) to fund their lending activities 

and to maintain liquidity for their operations. Long-term advances may be used only to support 

residential housing finance and, in the case of a community financial institution, to support 

lending to small businesses, small farms, and small agricultural businesses. The preponderance 

of the collateral supporting advances consists of mortgage assets. 

In addition to advances, the FHLBanks purchase qualifying mortgage loans from members 

under various acquired member asset programs. Under these programs, the FHLBank 

manages the market risk associated with the loans while members bear most of the credit 

risk through a loss-sharing arrangement or the purchase of mortgage insurance for the loans 

sold to the FHLBank. 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 4
THE FEDERAL HOUSING FINANCE BOARD

The Finance Board is an independent agency established by the Financial Institutions 

Reform, Recovery, and Enforcement Act of 1989. It is the successor agency to the former 

Federal Home Loan Bank Board, which was established by the Federal Home Loan Bank 

Act of 1932 (Bank Act). The Finance Board's statutory mandate is to ensure that the 

FHLBanks operate in a financially safe and sound manner, carry out their housing finance 

mission, and remain adequately capitalized and able to raise funds in the capital markets. 

In addition to its supervision of the FHLBanks, the Finance Board has regulatory authority 

and supervisory oversight responsibility for the Office of Finance, a joint office of the 

FHLBanks, which issues FHLBank System debt. 

The Finance Board is governed by a 5-member board of directors. Four of the directors 

are appointed by the President and confirmed by the Senate and must have extensive 

experience or training in housing finance or a commitment to providing specialized 

housing credit. The fifth member is the Secretary of the U.S. Department of Housing and 

Urban Development. No more than three directors may be members of the same political 

party. 

At least one appointed director must be from an organization with more than a 2-year 

history of representing consumer or community interests in banking services, credit needs, 

housing, or financial consumer protections. The appointed members of the board of 

directors serve staggered 7-year terms. The President designates the chairperson of the 

board of directors from among these appointed members. 

 

The Finance Board is organized into five Offices: 

The Office of the Board of Directors is responsible for setting the agency’s strategic 

direction and approving policies and regulations. By delegation from the full board, the 

chairperson supervises management and policy execution. The board generally meets 

monthly in public sessions. The agency’s chief information officer, who is responsible for 

the Finance Board’s technology and information systems, reports to the chairperson. 

The Office of Supervision is responsible for the supervision and examination of the 

FHLBanks and the Office of Finance. The Office of Supervision performs this function 

through annual on-site examinations, periodic visitations, and off-site monitoring. Other 

Office of Supervision responsibilities include supervisory policy and program 

development, regulatory analysis and development, and economic research and analysis. 

The Office of General Counsel provides legal support and guidance on interpretations of 

laws, regulations, and policies to Finance Board officials. The Office of General Counsel 

prepares legal documents on behalf of the Finance Board and represents the agency in 

judicial and administrative proceedings. The Office of General Counsel staff manages the 

Finance Board’s ethics and Freedom of Information Act programs and acts as the secretary 

to the board. 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 5
The Office of Management is the principal advisor to the Chairman of the Finance Board 

on management and organizational policies and is responsible for the Finance Board's 

administrative management programs. This includes responsibility for the Finance Board's 

finance and accounting, budget, personnel, payroll, contracting and procurement, and 

facilities and property management. 

The Office of Inspector General operates pursuant to the Inspector General Act of 1978, as 

amended. The Office of Inspector General conducts and supervises audits and 

investigations related to Finance Board programs and operations, and recommends policies 

to promote economy, efficiency, and effectiveness, and to prevent and detect fraud and 

abuse. 

FEDERAL HOUSING FINANCE BOARD

ORGANIZATION CHART

 

Board Director Board Director 

Chairperson 

 

Office of the 

Board of Directors

Board Director HUD Secretary 

or Designee 

Office of Inspector 

General 

Office of General 

Counsel 

Office of 

Supervision 

Office of 

Management 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 6
SUPERVISION OF THE FEDERAL HOME LOAN BANKS

The primary duty of the Finance Board is to ensure that the FHLBanks and the Office of 

Finance operate in a financially safe and sound manner. The Finance Board also assesses 

the FHLBanks’ administration of their affordable housing and community investment 

programs. 

Evaluating the performance, condition, and risk profile of each FHLBank through on-site 

examinations is the cornerstone of the Finance Board’s safety and soundness supervisory 

program. As part of each examination, examiners and other members of the Office of 

Supervision staff: (1) assess the FHLBank’s management of the credit, market, and 

operational risks that arise from its business and operations; (2) evaluate the FHLBank’s 

financial condition and performance, capital adequacy, and corporate governance; and (3) 

assess the FHLBank’s compliance with federal and state laws, and Finance Board rules 

and regulations. The Office of Supervision reviews the supervisory findings identified 

during the on-site examination throughout the year following the on-site examination, and at 

the next on-site examination. 

The Offices of General Counsel and Management and the other divisions in the Office of 

Supervision support the work of the Supervision and Examination Division. Office of 

Supervision staff members use quantitative methods and statistical, econometric, and 

financial models to estimate and evaluate the risks at each FHLBank, including changes in 

interest rates, interest rate spreads, and interest rate volatility. The Office of Supervision 

assesses the financial models used by the FHLBanks and evaluates the FHLBanks’ ability to 

respond to changing market and economic circumstances. 

The Office of Supervision monitors operational capabilities at the FHLBanks and financial, 

accounting, regulatory, housing, and mortgage market developments that may affect the 

FHLBanks. The Office of Supervision staff conducts financial and economic analyses of 

market conditions and trends, and the effects of these upon the FHLBank System’s financial 

condition, risk profile, and performance. 

In 1989, Congress expanded the FHLBank System’s public policy mission by establishing 

the Affordable Housing Program (AHP) and a Community Investment Program through 

which the FHLBanks provide funding to support the community and economic 

development activities of their members. In FY2008, the Finance Board will continue to 

examine and evaluate the FHLBanks’ AHP and community investment programs. 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 7
PRIORITIES, RESOURCES, AND PERFORMANCE MEASURES

The Finance Board’s planning, budgeting, and performance management process sets the 

strategic direction, determines planned activities and resources, measures and monitors 

performance throughout the year, and performs an annual performance assessment. These 

components reflect a continuous cycle of performance management centered on outcomes. 

The agency uses annual performance assessments to analyze performance and improve 

effectiveness and efficiency. 

The Finance Board produces three main reports as a result of this process. The agency’s 

Strategic Plan, covering a 5-year period, sets overall strategic goals for the agency. Two 

annual reports illustrate the ways the agency is directing its resources to achieve and 

measure its progress in achieving its strategic goals. First, the agency produces an Annual 

Performance Budget, which describes how it will allocate its resources in the upcoming 

fiscal year to achieve the strategic priorities outlined in the Strategic Plan. Second, the 

agency produces a Performance and Accountability Report annually, which summarizes 

the agency’s success during the fiscal year in meeting its goals and objectives as set forth 

in the Annual Performance Budget for that fiscal year. The Performance and 

Accountability Report also provides Finance Board financial and program performance 

information. 

In its fiscal year 2007-2012 Strategic Plan, the Finance Board established two strategic 

goals that guide its operation. The Strategic Plan is available on the agency’s website 

(www.fhfb.gov). The two strategic goals are: 

● The FHLBanks operate safely and soundly; and 

● The affordable housing and community investment programs of the FHLBanks 

operate effectively and efficiently. 

For each strategic goal, the agency established strategic outcomes that it expects to 

achieve. The Finance Board developed annual performance goals to provide indicators of 

progress by the Finance Board and the FHLBanks. Finally, in recognition of the fact that 

the goals the Finance Board has set depend not only on the actions of the Finance Board 

but also on the actions of each of the FHLBanks, the Finance Board has adopted annual 

performance measures for Finance Board actions to ensure that the agency is doing the 

most it can to ensure that it meets the strategic goals and outcomes. The relationship 

between strategic goals, outcomes, annual performance goals, and measures is depicted 

below. 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 8
STRATEGIC 

GOAL

STRATEGIC 

OUTCOMES

ANNUAL 

PERFORMANCE 

GOALS

ANNUAL 

PERFORMANCE 

MEASURES

1. The FHLBanks 

operate safely and 

soundly. 

1. The FHLBanks 

effectively identify and 

manage risk. 

2. The FHLBanks 

remain adequately 

capitalized and able to 

raise funds in the 

capital markets.

1. The FHLBanks 

address principal safety 

and soundness 

examination findings to 

the satisfaction of the 

Finance Board prior to 

the next examination. 

2. The FHLBanks 

correct supervisory or 

compliance issues 

within required 

timeframes. 

 

3. The FHLBanks’ 

combined financial 

statements comply with 

applicable laws, rules, 

and regulations.

1. Conduct all safety and 

soundness activities, 

including annual 

examinations, quarterly 

visitations, and off-site 

monitoring. 

2. Review safety and 

soundness examination 

findings with the FHLBanks 

semi-annually to ensure the 

FHLBanks are making 

progress to remedy identified 

shortcomings. 

3. Conduct on-site 

examination of the Office of 

Finance and review annual 

and quarterly combined 

statements issued by the 

Office of Finance for 

compliance with disclosure 

requirements. 

2. The FHLBanks’ 

affordable housing 

and community 

investment programs 

operate effectively 

and efficiently. 

1. The FHLBanks 

foster the development 

of owner-occupied and 

affordable rental 

housing for eligible 

very low-, low-, and 

moderate-income 

households. 

1. The FHLBanks 

address principal 

affordable housing 

examination findings to 

the satisfaction of the 

Finance Board prior to 

the next examination. 

2. The FHLBanks 

distribute affordable 

housing funds as 

approved in the AHP 

application. 

1. Conduct all affordable 

housing activities, including 

annual examinations and offsite monitoring. 

2. Review affordable housing 

and community investment 

examination findings with the 

FHLBanks semi-annually to 

ensure the FHLBanks are 

making progress to remedy 

identified shortcomings. 

3. Use examinations to 

review program effectiveness 

as well as compliance with 

the Bank Act, Finance Board 

regulations, and FHLBank 

policies. 

The Finance Board has established two strategic outcomes to indicate the degree to which 

it is achieving its first strategic goal that the FHLBanks operate safely and soundly. To the 

extent that the FHLBanks are able to effectively identify and manage risk, to remain 

adequately capitalized and able to raise funds in the capital markets, they are more likely to 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 9
operate safely and soundly. To provide even more precision, the Finance Board 

established annual performance goals to determine the degree to which the FHLBanks are 

acting promptly to correct deficiencies identified by the Finance Board, and to determine 

the degree to which the FHLBanks’ combined financial statements comply with applicable 

laws and regulations. The annual performance measures listed in the above table, 

conducting all safety and soundness examinations and activities, following up with the 

FHLBanks to ensure progress is being made to resolve deficiencies identified, and 

conducting an examination of the Office of Finance and reviewing the combined financial 

statements released by the Office of Finance, will ensure that the Finance Board is meeting 

its mandate to ensure the safe and sound operations of the FHLBanks. 

The Finance Board has established a strategic outcome to indicate the degree to which it is 

meeting its second strategic goal that the affordable housing and community investment 

programs of the FHLBanks operate effectively and efficiently. The strategic outcome 

requires the FHLBanks foster the development of owner-occupied and affordable rental 

housing for eligible very low-, low-, and moderate-income households. As indicators of 

annual progress by the FHLBanks in meeting the Finance Board’s goal of operating their 

affordable housing and community investment programs effectively and efficiently, the 

Finance Board has established two annual performance goals, one that reveals the degree 

to which the FHLBanks are acting promptly to correct deficiencies identified by the 

Finance Board, and another that indicates whether or not the affordable housing funds at 

each FHLBank are being distributed as approved in the AHP application. The annual 

performance measures listed in the above table, conducting affordable housing 

examinations, following up with the FHLBanks to ensure progress is being made to 

resolve deficiencies identified, and ensuring that Finance Board examinations review 

program effectiveness as well as compliance with applicable laws, AHP regulations, and 

policies, will ensure that the Finance Board is meeting its mandate to ensure the effective 

and efficient operations of the FHLBanks’ affordable housing and community investment 

programs. 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 10
ALLOCATING RESOURCES TO MEET OUR GOALS

The Finance Board has prepared its FY2008 Annual Performance Budget to link the 

agency’s strategic and performance goals to the costs of achieving those goals. To achieve 

these goals, the Finance Board identifies and resolves safety and soundness issues, 

promulgates regulations to enhance the safety and soundness of the FHLBanks, monitors 

the FHLBanks’ activities so they can serve the nation’s housing finance and community 

investment needs, and aligns the agency’s human capital and information technology 

initiatives to the Finance Board’s mission, goals, and outcomes. 

The tables below show that the agency has allocated the preponderance of available 

resources -- in both full-time equivalents and budgeted dollars -- to Strategic Goal 1, which 

reflects the primary duty of the Finance Board. 

STRATEGIC GOAL 1 

THE FEDERAL HOME LOAN BANKS OPERATE SAFELY AND SOUNDLY

Summary 

FY2006 

Actual 

FY2007 

Projected 

FY2008 

Budget 

Change from 

FY2007 

Program FTE 86.4 89.3 95.1 6.5% 

Infrastructure & Support FTE 20.2 21.1 23.8 12.8% 

 Total FTE 106.6 110.4 118.9 7.7% 

Program Expenses ($M) $19.6 $21.7 $24.6 13.4% 

Infrastructure & Support Expenses $ 4.6 $ 5.2 $ 6.2 19.2% 

 Total Budget $24.2 $26.9 $30.8 14.5% 

STRATEGIC GOAL 2 

THE AFFORDABLE HOUSING AND COMMUNITY INVESTMENT PROGRAMS OF 

THE FEDERAL HOME LOAN BANKS OPERATE EFFECTIVELY AND EFFICIENTLY

Summary 

FY 2006 

Actual 

FY 2007 

Projected 

FY 2008 

Budget 

Change from 

FY2007 

Program FTE 21.0 21.9 24.5 9.6% 

Infrastructure & Support FTE 4.9 5.2 6.1 17.3% 

 Total FTE 25.9 27.1 30.6 12.9% 

Program Expenses ($M) $4.8 $5.3 $6.3 18.9% 

Infrastructure & Support Expenses $1.1 $1.3 $1.6 23.1% 

 Total Budget $5.9 $6.6 $7.9 19.7% 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 11
MEANS AND STRATEGIES TO MEET OUR GOALS

To carry out its mission, the Finance Board has one principal program – supervision of the 

FHLBanks. Examinations are the cornerstone of the Finance Board’s supervisory 

program. The Finance Board monitors the performance, condition, controls, and risk 

profile of each FHLBank through on-site examinations and other supervisory activities. In 

addition, the Finance Board assesses the effectiveness of FHLBanks’ affordable housing 

and community investment programs through examinations and other supervisory 

activities. The Offices of General Counsel and Management support the Office of 

Supervision in carrying out the Finance Board’s supervisory program. 

Means and strategies determine the processes, skills, technologies, and resources that the 

Finance Board will use to achieve its strategic goals. These have a direct effect on the 

agency’s overall efficiency and effectiveness. The following means and strategies are 

used: 

LEVERAGE RESOURCES TO MAXIMIZE SUPERVISORY OVERSIGHT AND 

REGULATORY ACTIVITIES

The Finance Board staff has expertise in many disciplines including accounting, capital 

markets, community and economic development, economic and financial analysis, 

financial modeling, information technology, law, lending, and risk management. An 

examiner-in-charge is assigned to each FHLBank and to the Office of Finance and draws 

on the knowledge and skills of other examiners and agency staff in conducting supervisory 

activities. 

IDENTIFY EMERGING RISKS AND TRENDS

Supervising the FHLBanks is a dynamic activity. The examiner-in-charge, in consultation 

with other agency staff, identifies key risks, including market, credit, and operational risks 

at an FHLBank, and develops a supervisory strategy. The supervisory strategy allocates 

resources to risk areas for an individual FHLBank. 

APPLY TECHNOLOGY TO ENHANCE THE FINANCE BOARD’S EFFECTIVENESS

The Finance Board uses quantitative methods and financial models to provide analytical 

and technical support to the examination function. The agency assesses the market value 

and market value sensitivity of the FHLBanks, and monitors most closely the FHLBanks 

with the greatest market value sensitivity. 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 12
SUSTAIN AND IMPROVE ORGANIZATIONAL EXCELLENCE

The Finance Board achieves organizational excellence through recruitment and retention of 

highly skilled staff and regular development of its staff’s skills and knowledge. In recent 

years, the agency has established a performance-based pay system, increased staffing 

levels, and enhanced employee benefits. The Finance Board is committed to enhancing the 

performance, skills, and industry knowledge of it managers and staff through training and 

conference participation. 

The Finance Board’s supervisory program focuses on the FHLBanks’ programs, activities, 

and operations with the highest risk to the safety and soundness of the FHLBanks and their 

ability to achieve their housing finance mission. There is no evidence to suggest that the 

supervisory program would be more efficient or effective under an alternative approach. 

The program is designed to provide flexibility so the agency can promptly address 

emerging issues. The examiner-in-charge of each FHLBank annually develops a 

supervisory strategy that identifies the level and complexity of the market, credit, and 

operational risks associated with an individual FHLBank’s programs, activities, and 

operations. The Finance Board allocates its resources to focus on these risks and the 

identified weaknesses, trends, and emerging issues. 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 13
THE YEAR AHEAD

Ongoing Supervision. The Finance Board’s FY2008 operating budget includes $30.8 

million, which is 79.6 percent of the total agency budget, to undertake its safety and 

soundness supervisory program. To fulfill their housing finance mission, the FHLBanks 

offer advances, purchased mortgage programs, and other services. These activities result 

in the FHLBanks assuming varied and complex market, credit, and operational risks that 

they must evaluate and manage. The Finance Board’s safety and soundness supervisory 

program evaluates and monitors the FHLBanks condition and earnings and whether the 

risk management processes at each FHLBank effectively reflect and control the 

FHLBank’s level of risk. 

The Finance Board’s FY2008 budget includes $7.9 million to undertake its affordable 

housing and community investment supervisory program. The Finance Board examiners 

monitor the Banks’ compliance with statutory and regulatory requirements for affordable 

housing and community investment, evaluate program operations and controls, and assess 

program effectiveness. Most resources are devoted to AHP examinations, with the 

principal focus on the competitive application program and the homeownership set-aside 

program. 

During FY2008, the Finance Board’s supervisory program will focus on (i) activities, 

operations, and strategies that pose risks to the safety and soundness of the FHLBanks and 

(ii) the FHLBanks’ effectiveness in carrying out their housing finance mission, which 

includes, but is not limited to, their affordable housing and community investment 

programs. The following processes are central to the Finance Board’s application of a 

risk-based supervisory approach: (1) identification of market, credit, and operational risks; 

(2) use of common methods of evaluation to measure these risks; and (3) determination of 

whether the policies, systems, and processes employed by each FHLBank and the Office of 

Finance enable its board of directors and senior management to manage existing and 

prospective levels of risk. 

At the conclusion of an on-site examination, Finance Board examiners discuss their 

findings with the FHLBank’s senior management. The agency uses reason and moral 

suasion to influence the practices of the FHLBanks. When those methods are unsuccessful or 

concerns are raised to a level of significance, the Finance Board may use informal and/or formal 

enforcement actions to correct practices, conditions, or violations of law and/or regulations. 

When the Finance Board examination staff identifies significant supervisory or compliance 

issues, including unsafe and unsound practices, weaknesses, or violations of laws or 

regulations, the Finance Board may enter into supervisory agreements with the FHLBank. 

Risk-Focused Supervision. In FY2007, the Finance Board implemented the Federal Home 

Loan Bank Risk Rating System (FHLBRS) under which each FHLBank and the Office of 

Finance is assigned a composite rating based on evaluations of five key components: 

corporate governance, market risk, credit risk, operational risk, and financial condition and 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 14
performance. In FY2008, the agency will focus on evaluating the consistency of 

examination ratings standards across the 12 FHLBanks. In addition, the agency will more 

explicitly incorporate AHP findings into the FHLBRS. 

During 2008, the Finance Board will follow-up on adverse findings in 2007 reports of 

examination, paying particular attention to findings related to operational risk and 

information technology, derivatives practices, capital, and liquidity management. This will 

require greater integration between risk modeling and capital markets examination staff. 

Examinations will assess the adequacy and prudence of market risk limits of the 

FHLBanks and their compliance with those limits as well as the adequacy of their retained 

earnings in light of risks and capital structure. The scope of each examination will reflect 

the principal risks facing the institution, including input from the examination staff, 

modeling staff, bank analysts, accountants, and economists. During FY2008, the Office of 

Supervision may also conduct cross-FHLBank (horizontal) reviews of specific issues, e.g., 

collateral or management of the acquired member assets programs. 

Off-Site FHLBank Monitoring and Analysis. Finance Board analysts review FHLBank 

activities, financial condition, fiscal and operating performance, and regulatory 

compliance, and assess market developments that may affect the FHLBank System. These 

analysts also work closely with the examination staff to establish the scope of examination 

of the FHLBanks and review the financial condition and performance of the FHLBanks at 

the on-site examinations. Finance Board analysts also prepare analytical papers on market 

conditions and trends and their effects on the FHLBank System’s condition, profitability, 

and stability. 

Economic and Financial Analysis. The principal means for providing support to the 

examinations is through evaluations of the quality of risk modeling at the FHLBanks and 

through the research and analysis of systemic trends affecting the FHLBanks and the 

FHLBank System. The staff contributes to each report of examination. The primary 

means for providing program analysis and regulatory and policy development support is 

through statistical and other quantitative analyses of factors influencing FHLBank 

performance and through research and analytical support for Finance Board regulatory or 

policy initiatives, including longer-term policy-oriented research to support regulatory and 

supervisory initiatives. The staff also prepares semi-annual profiles of the 12 FHLBanks 

and the FHLBank System, along with periodic reporting of trends or market developments 

affecting the FHLBanks and monitors trends affecting housing finance and the housing 

industry. 

In FY2008, staff will continue the development of a “model FHLBank,” which will 

simulate the risks and expected returns of an FHLBank with similar asset, liability, and 

hedging strategies. Also continuing into FY2008 is the research necessary to update the 

Finance Board’s risk-based capital standards. As part of this work, economists will also be 

examining the potential for a link between risk-based capital and the appropriate level of 

retained earnings at an FHLBank. 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 15
Quality Assurance. In FY 2007, the Office of Supervision established a Quality Assurance 

Unit to provide objective assessments of the office’s supervisory and regulatory operations 

and to add value by identifying potential opportunities to improve or enhance existing 

practices. In FY2008, the Quality Assurance Unit will conduct its first formal review of 

Finance Board examinations to assess their quality, accuracy, completeness, organization, 

and conformance with agency policies. The Quality Assurance Unit will also finalize 

procedures for its future reviews of other Office of Supervision functions. 

Policy and Regulations. In FY2007, the Office of Supervision created a Supervisory and 

Regulatory Policy Division responsible for safety and soundness, accounting policy, and 

AHP and community investment policy. During the year, the Finance Board finalized 

rules regarding appointment of FHLBank directors and permissible financial interests for 

those directors. In addition, the Office of Supervision issued guidance on non-traditional 

and sub prime residential lending. Monitoring related developments will remain a priority 

in FY2008. In FY2008, efforts will continue to reassess and refine the agency’s regulatory 

infrastructure including completion of a review of the acquired member assets regulation, 

governance issues specific to compensation, and enhanced accounting policy guidance. 

Additional goals include a review of the FHLBanks’ collateral policies and procedures, 

and development of revised risk-based capital standards after the ongoing research is 

completed. 

New Business Activities. When an FHLBank determines that it wants to engage in a new 

business activity, it must provide notification to the Finance Board, which then has 60 days 

to respond before the FHLBank can engage in this activity. In its review of a new business 

notice, the Finance Board will assess whether the proposed activity is legal, identify the 

risks associated with the activity, and evaluate the ability of the FHLBank to manage those 

risks. The Finance Board will approve an activity it deems appropriate for the FHLBank. 

The Finance Board reviews implementation of an approved new business activity as part of 

the on-site examination. In order to allow an FHLBank to respond in a timely manner to 

emerging needs or requests by its members, in FY2008 the Finance Board seeks to 

evaluate completed new business activity requests within 45 days (on average). 

Capital Structure Plans. In December 2000, the Finance Board adopted a regulation that 

requires the FHLBanks to establish a new risk-based capital structure. The new capital 

structure establishes minimum capital standards and requires the FHLBanks to set the 

minimum amount of FHLBank stock that members must hold. In 2002, the Finance Board 

approved the capital structure plans submitted by the FHLBanks and to date, 11 of the 12 

FHLBanks have implemented their plans. 

Finance Board approval is required for amendments to an FHLBank’s capital structure 

plan. To allow an FHLBank to respond in a timely manner to emerging needs, in FY2008 

the Finance Board plans to assess completed proposals to amend a capital plan within 45 

days (on average). 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 16
Combined FHLBank System Financial Statements. Each FHLBank is now subject to the 

Securities Exchange Act of 1934 periodic disclosure requirements, which include the 

periodic preparation and filing of public disclosures relating to its financial condition, 

results of operations, trends, or uncertainties affecting its business, and management’s 

assessment of its business and financial condition, including supporting financial 

information and certifications. The Office of Finance prepares the combined financial 

statements for the entire FHLBank System in accordance with 12 C.F.R. 

§ 985.6(b). The Finance Board assesses whether the combined financial statements 

comply with the agency’s regulations and policies. 

Risk Monitoring and Information Technology Support. The Finance Board continues to 

enhance the agency’s data management and information systems. In FY2007, the agency 

continued to collect data in accordance with the requirements outlined in the Data 

Reporting Manual. During FY2008, the Finance Board will establish policies and 

procedures to govern the release of data the Finance Board receives from the FHLBanks 

and the distribution of sensitive information to the FHLBanks over the Internet. 

The Call Report System (CRS.net) provides an integrated framework through which the 

Finance Board gathers financial and other information from and about the FHLBanks. 

Specifically, CRS.net captures the FHLBanks’ call report information as well as certain 

instrument level data used by the FHLBanks to run their financial models. In FY2008, we 

will evaluate the need for further enhancements to CRS.net, especially inclusion of risk 

management data through CRS.net. 

In FY2008, the agency plans to begin re-specifying and rebuilding the Membership system 

database as well as reviewing and augmenting policies and procedures for capture, 

maintenance, and distribution of information. In addition, the Finance Board will continue 

to develop off-site risk monitoring and reporting functions to build upon the information 

collected from the FHLBanks. 

Supervisory Guidance. In FY2007, the Finance Board substantively revised its safety and 

soundness examination manual and work programs. The agency will continue to update 

this manual to incorporate feedback from examiners using the manual and comments, if 

any, from the public and the FHLBanks. An Office of Supervision training program was 

developed, and the first training module was offered in late FY2007. The Office of 

Supervision will continue to enhance this training with additional modules focusing on 

specific subject matter areas. In FY2008, guidance will be developed regarding the 

content of and schedules for the preparation and delivery of Reports of Examination. 

In FY2008, the Finance Board will continue to develop and issue supervisory guidance to 

the FHLBanks through advisory bulletins and regulatory interpretations. Staff will provide 

timely guidance that incorporates effective best practices in response to emerging risks, the 

evolving activities and operations of the FHLBanks, developments in the financial 

markets, and new supervisory issues. 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 17
PERFORMANCE MEASUREMENT: ASSESSING OUR PROGRESS

For each strategic goal, the agency established strategic outcomes that it expects to 

achieve. The Finance Board developed annual performance goals to provide indicators of 

progress by the Finance Board and the FHLBanks. Finally, in recognition of the fact that 

the goals the Finance Board set depend not only on the actions of the Finance Board but 

also on the actions of each of the FHLBanks, the Finance Board has adopted annual 

performance measures only for Finance Board actions to ensure that the agency is doing 

the most it can to ensure that it meets the strategic goals and outcomes. Listed below are 

the annual performance measures and the degree to which they have been achieved. Most 

of the measures are new, reflecting the agency’s efforts to continually evaluate and revise 

if necessary, its performance measures to provide assurance that it is holding itself to 

standards that reflect its own actions. The Finance Board will report on its progress in 

meeting these annual performance measures in its FY2008 Performance and 

Accountability Report, which will be issued in November 2008. 

STRATEGIC GOAL 1 

THE FEDERAL HOME LOAN BANKS OPERATE SAFELY AND SOUNDLY

ANNUAL PERFORMANCE MEASURES

2002 2003 2004 2005 2006 2007 

Year-toDate 

1. Conduct all safety and 

soundness activities, including 

annual examinations, quarterly 

visitations, and off-site 

monitoring.

Achieved Achieved Achieved Achieved Achieved On 

Schedule 

2. Review safety and 

soundness examination 

findings with the FHLBanks 

semi-annually to ensure the 

FHLBanks are making progress 

to remedy identified 

shortcomings. 

New Metric 

3. Conduct on-site 

examination of the Office of 

Finance and review annual and 

quarterly combined statements 

issued by the Office of Finance 

for compliance with disclosure 

requirements. 

New Metric 

 

FY2008 ANNUAL PERFORMANCE BUDGET PAGE 18
FY2008 ANNUAL PERFORMANCE BUDGET PAGE 19

STRATEGIC GOAL 2 

THE AFFORDABLE HOUSING AND COMMUNITY INVESTMENT PROGRAMS OF

 THE FEDERAL HOME LOAN BANKS OPERATE EFFECTIVELY AND EFFICIENTLY

ANNUAL PERFORMANCE MEASURES

2002 2003 2004 2005 2006 2007 

Year-toDate 

1. Conduct all affordable 

housing activities, including 

annual examinations and offsite monitoring. 

New Metric 

2. Review affordable housing 

and community investment 

examination findings with the 

FHLBanks semi-annually to 

ensure the FHLBanks are 

making progress to remedy 

identified shortcomings. 

New Metric 

3. Use examinations to review 

program effectiveness as well 

as compliance with the Bank 

Act, Finance Board regulations, 

and FHLBank policies. 

New Metric