Federal Housing Finance Board

Performance and Accountability Report 

Fiscal Year 2005 

November 15, 2005 
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TABLE OF CONTENTS 

MESSAGE FROM THE CHAIRMAN 

Page

I. MANAGEMENT DISCUSSION AND ANALYSIS 

About the Finance Board ................................................................ 1

The Year in Review .................................................................... 3

Challenges ................................................................................. 5

Program Performance Overview ........................................................ 6

Financial Performance Overview ...................................................... 10

II. PROGRAM PERFORMANCE 

Measuring and Reporting Performance .............................................. 12

Annual Goals and Measures ............................................................ 12

Program Evaluation ..................................................................... 22

III. AUDITOR’S REPORT AND FINANCIAL STATEMENTS 

IV. APPENDICES 

Inspector General’s Memorandum, dated October 31, 2005 

Office of Supervision’s Memorandum, dated October 27, 2005 
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MESSAGE FROM THE CHAIRMAN 

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

Performance and Accountability Report (Report) for fiscal year 2005 (FY2005). This 

Report provides Finance Board financial and program performance information and 

summarizes the agency’s success in meeting its FY2005 goals and objectives as set forth 

in the FY2005 Annual Performance Budget. 

The Finance Board is dedicated to providing timely, reliable, and useful information to 

the Federal Home Loan Banks, government officials, and the public. FY2005 was a 

productive year at the Finance Board. In general, the agency met the goals established in 

the 2005 Annual Performance Budget. In addition, the Finance Board made substantial 

progress toward strengthening the agency and positioning itself to carry out its 

responsibilities more efficiently and effectively. 

The FY2005 financial statements, including an unqualified opinion, are provided in this 

report. This clean opinion attests to the fact that the agency’s financial statements are 

fairly presented and demonstrate discipline and accountability in the execution of its 

responsibilities. This report also includes a statement of reasonable assurance that the 

Finance Board’s management accountability and controls are adequate and effective. 

The staff at the Finance Board will continue to work to promote the safety and soundness 

of the Federal Home Loan Banks and build on the agency’s accomplishments. 

Ronald A. Rosenfeld 

Chairman 
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MANAGEMENT DISCUSSION AND ANALYSIS 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

1 

ABOUT THE 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 (FHLBank Act). The Finance Board's statutory mandate is to 

ensure that the Federal Home Loan Banks (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. 

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. In addition to its 

supervision of the FHLBanks, the Finance Board also has regulatory authority and 

supervisory oversight responsibility for the Office of Finance (OF), a joint office of the 

FHLBanks, which issues FHLBank System debt. 

MISSION STATEMENT 

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. 

VISION

To continue to earn the public’s trust, the Finance Board is dedicated to the highest 

professional standards of accountability and independence to carry out its responsibilities 

for FHLBank supervision and housing finance mission oversight. 

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 OF. 

• 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, effectively, and creatively to emerging risks and opportunities 

in the financial system. 
MANAGEMENT DISCUSSION AND ANALYSIS 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

2 

• Integrity. The Finance Board discharges its responsibilities fairly and impartially 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. 

ORGANIZATION

The Finance Board is governed by a five-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 two-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 seven-year terms. The President designates the chairperson 

of the board of directors from among these appointed members. 

The Finance Board is organized into the following offices: the Office of the Board of 

Directors, the Office of Supervision, the Office of the General Counsel, the Office of 

Management, and the Office of the Inspector General. 

The Office of the Board of Directors (Board) is responsible for setting the overall 

strategic direction of the Finance Board, and approves policies and regulations relating to 

the safety and soundness of the FHLBanks, their access to the capital markets, and the 

accomplishment of their congressionally defined housing finance mission. The board 

normally meets monthly in public sessions. 

The Office of Supervision (OS) is responsible for the examination and supervision of the 

FHLBanks and the OF. The examinations focus on the FHLBanks’ corporate 

governance, risk profile, risk management, and prudent operating practices relating to 

market, credit, and operational risk. The examinations also check for compliance with 

applicable laws, regulations, and policies. Our examination and supervisory 

responsibilities cover safety and soundness and affordable housing and community 

development. 

The Office of General Counsel (OGC) provides legal support and guidance for the 

Finance Board. The Office of General Counsel provides legal support and guidance on 

interpretations of statutes and regulations to Finance Board officials. The office prepares 

all legal documents on behalf of the Finance Board and prepares opinions, regulations, 

and memoranda of law, and represents the Finance Board in judicial and administrative 

proceedings. 
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The Office of Management (OM) is responsible for the Finance Board’s technology and 

information systems and administrative functions, such as finance and accounting, 

budgeting, human resources, personnel, payroll, contracting and procurement, facilities 

and property management, and records management. 

The Office of the Inspector General (OIG) was established under FIRREA and operates 

in compliance with the Inspector General Act of 1978 and the 1988 amendments to that 

Act. The OIG conducts audits of the offices and functions of the Finance Board to ensure 

that the Finance Board functions as efficiently and effectively as possible. The OIG also 

provides leadership for activities designed to promote economy, efficiency, and 

effectiveness in the administration of the Finance Board and its relationship with the 

FHLBank System, and to prevent and detect waste, fraud, and abuse in programs and 

activities conducted by the Finance Board. 

The Finance Board’s headquarters office is located in Washington, D.C., where a 

majority of the agency’s staff is located. The Finance Board also has examination staff 

stationed in each of the 12 FHLBank districts. 

The Finance Board’s budget for FY2005 was $36.4 million with 146.8 full-time 

equivalent staff at fiscal year-end. Approximately 83 percent of the budget is devoted to 

the examination and supervision of the FHLBanks. 

THE YEAR IN REVIEW 

The agency’s accomplishments for FY2005 were concentrated in five areas: (1) 

regulatory and supervisory policy initiatives; (2) safety and soundness examination and 

supervision; (3) risk monitoring and risk modeling; (4) community investment and 

Affordable Housing Program (AHP); and (5) organizational enhancements. 

Regulatory and Supervisory Policy Initiatives. By regulation adopted in June 2004, the 

Finance Board required the FHLBanks to register a class of equity securities with the 

Securities and Exchange Commission (SEC) by August 31, 2005. Two FHLBanks, the 

FHLBank of New York and the FHLBank of San Francisco, met the deadline of August 

31, 2005 for effective registration. Registration has been delayed by accounting and 

disclosure issues at the other ten FHLBanks. Those FHLBanks continue to work with the 

SEC and submit weekly progress reports to the Finance Board. Until they have 

registered, those FHLBank are subject to dividend restrictions as established by the 

Finance Board’s Advisory Bulletin 05-07. Other initiatives in this area include 

supervisory guidance on risk modeling, risk management, disclosure, and capital 

management. 

The Finance Board continued to develop a Data Quality and Timeliness Regulation, 

which will consolidate data reporting requirements from individual regulations into a 

Data Reporting Manual (Data Manual). The first two chapters of the Data Manual, 
MANAGEMENT DISCUSSION AND ANALYSIS 

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4 

addressing call report data and membership data, were finalized in FY2005. Additional 

chapters, including AHP data, will be completed in 2006. 

Safety and Soundness Examination and Supervision. The Finance Board examination 

program continues to fulfill its statutory mandate by, among other things, monitoring risk 

and exposure levels at the FHLBanks. The Finance Board conducts examinations and 

quarterly on-site visitations at each FHLBank and the OF. At the conclusion of each 

examination, a Report of Examination is prepared that summarizes examiners’ findings 

and assigns a conclusion of the level of supervisory concern. A meeting is held with each 

FHLBank’s board of directors to present the Report of Examination and discuss 

continuing matters of concern. 

Examinations are risk-focused and effective tools in prompting action by the FHLBanks 

to enhance their risk management. The Finance Board has written agreements with two 

FHLBanks. These agreements constitute a formal supervisory and enforcement action on 

the part of the Finance Board and have resulted in substantial therapeutic benefits to these 

individual FHLBanks, as well as across the FHLBank System. 

Risk Monitoring and Risk Modeling. In 2005, the agency continued to assess the 

integration of an enterprise data repository to standardize and link the Finance Board’s 

data collection and management processes. This repository will facilitate the retrieval, 

manipulation, and analysis of data across platforms and systems, and significantly 

enhance the agency’s off-site monitoring capabilities. 

During FY2005, the Risk Modeling Division provided technical and analytical 

examination support using a variety of models and model review procedures to validate 

FHLBanks’ risk modeling capabilities. The risk modelers independently verify the 

market values and market value sensitivities of the FHLBanks’ financial positions. The 

risk modelers participate at the on-site examinations and, as warranted, quarterly 

visitations. 

Community Investment and AHP. In FY2005, the Finance Board completed its horizontal 

review of the AHPs of the FHLBanks. The Finance Board issued a report of this Systemwide review in March 2005. This review concluded that the FHLBanks have met their 

statutory obligations under the AHP and are a significant source of affordable housing 

financing in their districts. The report also concluded that there was room for 

improvement at each FHLBank. For example, the review identified shortcomings in 

management information systems to monitor projects awarded AHP funds and in the 

administration of the AHP set-aside program at certain FHLBanks. 

Organizational Enhancements. In FY2005, a number of human resource initiatives were 

taken to support the Finance Board’s focus on safety and soundness of the FHLBanks. 

Three teams of examiners were established, each concentrating on a portfolio of four 

FHLBanks. A portfolio manager leads each portfolio, and an examiner-in-charge (EIC) 

is designated for each FHLBank. The portfolio manager has the responsibility for 

managing the resources and conducting planning operations for his portfolio. The EICs 
MANAGEMENT DISCUSSION AND ANALYSIS 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

5 

are the central point of contact for all communications with the FHLBanks and have the 

responsibility of managing the ongoing supervision of their FHLBank. The EIC is 

responsible for being aware of and keeping OS management informed about all activities 

at the FHLBank that have a bearing on supervisory and examination matters. 

During the past year we have added an examination specialist position to each portfolio. 

The examination specialist is a resource for the portfolio manager and EICs. These 

positions have been filled on an “acting” basis during FY2005, but they will be filled on a 

permanent basis in early FY2006. These examination specialists add another review and 

assessment of the reports of examination prior to their completion and issuance. In that 

way, the examination specialists will provide a level of quality assurance. They are also 

tasked with checking that the examination work papers are complete at the end of every 

annual examination, assisting in the planning process, helping to develop supervisory 

strategies, and coordinating the supervision of the portfolio of FHLBanks. 

In an effort to improve its business processes and internal controls, the Finance Board’s 

accounting, procurement, and travel activities were outsourced to the Bureau of Public 

Debt’s Administrative Resource Center in 2005. Standardized reports are being 

developed to better monitor the agency’s actual expenses to budget. In addition, 

information technology enhancements were emphasized. Information security was 

enhanced with a focus on password controls, and information technology support was 

provided on-site during the examinations to improve efficiency. The Finance Board also 

revamped its external website to improve communications among the Finance Board, the 

FHLBanks, and other external sources. 

Finally, the agency’s headquarters, which was previously housed in two locations, was 

consolidated and relocated to one new leased office space that is fully compliant with the 

Americans with Disabilities Act and other life safety standards. 

CHALLENGES 

KEY EXTERNAL FACTORS 

Performance of the FHLBanks can be affected by conditions beyond their control. For 

example, macroeconomic developments affecting interest rates, national or regional 

economic activity can affect the economic performance of the FHLBanks. Other external 

factors with the potential to affect the FHLBanks include developments in capital and 

housing markets. Regulatory developments, including developments in accounting 

standards set by the Financial Accounting Standards Board and disclosure requirements 

set by the SEC, along with new legislation, have the potential to significantly affect the 

environment in which the FHLBanks must operate. Regardless of the source of the 

influences on FHLBank performance, the Finance Board must respond promptly to 

ensure the FHLBanks meet whatever challenges affect their performance. 
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Legislation: For much of the past year, the Congress has been debating new legislation that 

would establish a single agency as the regulator for all government-sponsored enterprises 

(GSEs) involved in the home mortgage market. This new agency would oversee the 

safety, soundness, and housing mission achievement of Fannie Mae, Freddie Mac, and 

the FHLBanks. 

Developments in Banking and Financial Markets: The banking sector has been and will 

likely continue to experience significant consolidation. In addition, financial markets 

continue to evolve, with new products and services introduced on a regular basis. These 

developments have the potential to affect, both positively and negatively, the demand for 

FHLBank products and services, and the financial performance of the FHLBanks. As the 

industry changes, the supervisory focus of the Finance Board must also change to ensure 

that it continues to effectively supervise the FHLBanks. Recent matters attracting 

discussion include lender and assignee liability from predatory loans, standards of 

accountability for the officers and directors under the Sarbanes-Oxley Act of 2002, 

advance prepayment fees, the potential for housing price decreases in selected markets, 

increased foreclosure activity in areas affected by natural disasters, consolidation of the 

financial services industry, and increasing demands on institutions to improve management 

and control risks. 

Staffing: In a competitive financial services environment where highly skilled personnel 

are in great demand, a continuing challenge for the Finance Board is retention of a highly 

competent work force and, as needs dictate, recruitment of additional examination, 

supervision and accounting staff with the requisite financial and technological skills to 

model, monitor, and assess the risks undertaken by the FHLBanks. 

PROGRAM PERFORMANCE OVERVIEW 

The Finance Board evaluates its program performance within a structured planning, 

budgeting and performance management process. In its FY 2003-2008 Strategic Plan, 

the agency established three strategic goals that guide its operation. The strategic plan is 

available on the agency’s website (www.fhfb.gov). For each strategic goal, the agency 

established strategic objectives that describe how the strategic goal will be accomplished. 

While some of the objectives are easily measured, e.g., whether or not the FHLBanks 

meet or exceed their required capital ratios, others are more subjective. Accordingly, the 

Finance Board has adopted for each objective a number of annual performance goals and 

accompanying annual performance measures to determine the degree to which the 

strategic objectives, and ultimately the strategic goals are achieved. The nested structure 

of strategic goals, objectives, and annual performance goals and measures is listed in the 

table below. 
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Strategic Goal Strategic Objectives Annual Performance Goal Annual Performance 

Measure

1.1a Conduct all safety and 

soundness activities, including 

annual examinations, quarterly 

reviews, and off-site 

monitoring on a timely basis. 

1.1 The FHLBanks operate 

safely and soundly. 

1.1 Maintain an effective riskbased examination program. 

1.1b Assess effectiveness of 

corrective actions at annual 

on-site safety and soundness 

examinations, quarterly 

reviews or more frequently, as 

appropriate. 

1.2a Each FHLBank 

continuously meets or exceeds 

its minimum capital 

requirement. 

1.2 The FHLBanks meet or 

exceed their minimum capital 

requirements. 

1.2 Each FHLBank satisfies 

its applicable capital 

requirements and prudently 

manages capital and earnings. 

1.2b Each FHLBank 

implements or makes progress 

in implementing its capital 

structure plan. 

1.3a The FHLBanks maintain 

a triple A credit rating for their 

consolidated obligations. 

1.3a Conduct semi-annual 

assessment of FHLBank 

System cost of funds and 

maintain ratings for 

consolidated obligations and 

FHLBank credit ratings at 

regulatory requirements. 

1. Supervision program 

effectively fosters safe and 

sound operations at each 

FHLBank. 

1.3 The FHLBanks raise 

funds efficiently and are role 

models for transparency and 

accountability. 

1.3b Each FHLBank’s and the 

FHLBank System’s financial 

disclosures comply with 

applicable laws, rules, and 

regulations. 

1.3b Conduct on-site 

examination of the OF and 

review annual and quarterly 

financial reports issued by the 

FHLBank System and each 

FHLBank. 

2.1a Advances of each 

FHLBank are in compliance 

with the FHLBank Act and 

Finance Board regulations. 

2.1 The FHLBanks facilitate 

the housing finance activities 

of their members. 

2.1 The FHLBanks adhere to 

public policy principles and 

safety and soundness 

requirements when supporting 

affordable housing and 

promoting community 

development. 

2.1b Acquired member assets 

program is responsive to the 

needs of members, and 

supports the nation’s housing 

finance system. 

2.2a Conduct examinations of 

the Affordable Housing and 

Community Investment 

Programs at each FHLBank. 

2.2b Assess effectiveness of 

corrective actions at annual 

on-site examinations or at 

periodic reviews. 

2. Ensure that the FHLBanks 

serve the nation’s housing 

finance and community 

investment needs. 

2.2 The FHLBanks support 

affordable housing and 

promote community 

investment. 

2.2 Perform effective 

operational risk-based 

examination of the Affordable 

Housing Programs at each 

FHLBank. 

2.2c Review FHLBank 

Community Lending Plans, 

annually, and FHLBank 

member Community Support 

Statements, biennially. 
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Strategic Goal Strategic Objectives Annual Performance Goal Annual Performance 

Measure

2.2d Appoint public interest 

directors, including 

community interest directors 

to board of directors of each 

FHLBank. 

3.1a Review, revise and 

supplement Finance Board 

regulations, where appropriate. 

3.1 The Finance Board takes 

appropriate and timely 

regulatory and advisory 

actions. 

3.1 Regulations and advisory 

actions are reviewed, revised, 

and supplemented to ensure 

relevance, transparency, and 

issue-oriented supervisory 

guidance. 

3.1b Respond to new business 

activity notices filed by the 

FHLBanks within 60 days. 

3.2a Align budgeted resources 

including staff and information 

technology with projected 

workloads and business 

priorities. 

3. Use supervisory, 

managerial, and legal 

resources to support effective, 

efficient, and responsive 

FHLBank supervision, 

regulation, and housing 

oversight. 

3.2 The Finance Board 

prudently allocates resources 

to fulfill its mission effectively 

and efficiently. 

3.2 Fiscal, physical, and 

human resources are used 

efficiently and effectively to 

fulfill the Finance Board’s 

fiduciary responsibilities. 

3.2b Business continuity and 

contingency plans are 

maintained and tested. 

THE FHLBANKS OPERATE SAFELY AND SOUNDLY 

STRATEGIC GOAL 1: Supervision program effectively fosters safe and sound operations at 

each FHLBank. 

In FY2005, the Finance Board met all six of its annual performance measures, along with 

the four performance goals, thereby ensuring that the strategic objectives were met. In 

this way, the Finance Board was successful in achieving strategic goal 1 of ensuring that 

the supervision program effectively fosters the safe and sound operations at each 

FHLBank. The examination program was enhanced to promote sound risk management 

at the FHLBanks, principally through the issuance of advisory bulletins on risk 

management and on examination conclusions, which identify an institution as 

satisfactory, fair, marginal, or unsatisfactory. 

While only two of the 12 FHLBanks registered with the SEC by the regulatory deadline, 

the other ten FHLBanks are working diligently to become registrants. The delay in 

registering with the SEC has arisen primarily because of a SEC decision with respect to 

certain accounting rules that are at odds with the FHLBanks’ previous interpretations. 

The Finance Board’s regulation requiring the FHLBanks to register with the SEC is part 

of its efforts to ensure that the FHLBanks raise funds efficiently and are role models for 

transparency and accountability. The Finance Board’s efforts on this front and the 

FHLBanks’ efforts to become registrants further the objectives of enhanced disclosure 

and accountability, consistent with strategic objective 1.3. 
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THE FHLBANKS FULFILL THEIR HOUSING FINANCE MISSION 

STRATEGIC GOAL 2: Ensure that the FHLBanks serve the nation’s housing finance 

and community investment needs. 

During FY2005, the Finance Board met three out of the four performance measures in 

support of this strategic goal, specifically related to supervision of FHLBanks’ advances, 

acquired member assets, affordable housing and community investment programs, and 

review of FHLBanks’ community lending plans. However, the Finance Board, with due 

consideration of the potential conflict of interest inherent in appointing representatives to 

the boards of directors of institutions it regulates, did not appoint public interest directors 

to the boards of directors at the FHLBanks to fill expired terms in 2005. The Finance 

Board instead will consider soliciting recommendations from the FHLBanks of qualified 

persons with skills and capabilities that could address any gaps that might exist in their 

boards of directors. If warranted, the Finance Board may make such appointments as are 

necessary in the future pending adoption of statutory changes to the composition of the 

FHLBanks’ boards of directors, such as have been recommended by the Finance Board. 

The FHLBanks subsidize the cost of affordable owner-occupied and rental housing. The 

subsidy may be in the form of a grant or a below-cost or subsidized interest rate on an 

FHLBank advance to a member. An in-depth review of the AHPs at the FHLBanks 

found that these programs have been carried out in compliance with statutory and 

regulatory requirements. The review also identified areas in which program 

implementation could be improved. 

During 2005, the Finance Board made considerable progress in reviewing and revising 

the regulation governing the AHPs at the FHLBanks. Many of the lessons learned during 

the in-depth review of the AHPs, as administered at the FHLBanks and as regulated by 

the Finance Board, informed our review and revision of the AHP regulation. 

MANAGEMENT OF FINANCE BOARD RESOURCES 

STRATEGIC GOAL 3: Use supervisory, managerial, and legal resources to support 

effective, efficient, and responsive FHLBank supervision, regulation, and housing 

oversight. 

The Finance Board met all four annual performance measures associated with this goal. 

In FY2005, the Finance Board disseminated advisory bulletins that discussed SEC 

registration of debt, the Affordable Housing Set-Aside Program, regulatory reporting 

under certain accounting standards, standards for management and board risk 

management oversight, and internal market risk models. 

In 2005, the Finance Board hired 35 additional full-time staff, principally bank examiners. 

In addition, the Finance Board continued to use external contractors to perform 

administrative functions, such as information technology support. During 2005, the 
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10 

Finance Board contracted with the Department of the Treasury’s Bureau of Public Debt 

to provide financial management and travel related service support. 

The agency continued to enhance its data management and information systems to improve 

data integrity and consistency across the FHLBank System. The AHP database is being 

updated to ensure that it is a repository for the information needed to perform examination, 

supervision and oversight functions. This database will be used for reporting purposes by 

the end of the 2006 calendar year. 

Finally, the agency’s headquarters relocated to new, leased office space. This space is fully 

compliant with the Americans with Disabilities Act and other life safety standards that had 

presented additional challenges in the previous office space. 

FINANCIAL PERFORMANCE OVERVIEW 

As of September 30, 2005, the financial condition of the Finance Board was sound. 

There are sufficient funds to meet program needs and adequate controls in place to ensure 

that obligations do not exceed budget authority. 

FINANCIAL HIGHLIGHTS 

The Finance Board draws its financial resources from assessments of the twelve 

FHLBanks. It receives no appropriations, and its funds are not subject to apportionment. 

The FY2005 budget authority was $36.5 million. In FY2005, approximately 60 percent 

of the agency’s budget was allocated to salaries and benefits. The remaining 40 percent 

was used for technical assistance for the agency’s information technology and risk 

management systems, and for staff travel and operating expenses. 

The FY2005 budget represented an increase in budget authority of over $5.3 million or 

17 percent over FY2004. This primarily reflects the expansion of agency examination 

resources to more fully support the Finance Board’s supervisory program, including new 

positions and consulting services related to enhancements of the agency’s risk modeling 

capabilities. 

MANAGEMENT ACCOUNTABILITY AND CONTROL 

In accordance with applicable requirements of 31 U.S.C. § 3512, and Office of 

Management and Budget Circular A-123 (rev. June 21, 1995), the Finance Board 

provides this statement of reasonable assurance that the agency’s management 

accountability and controls are adequate and effective, and there are no material 

weaknesses to report. The objectives of the system of management accountability and 

control of the Finance Board are to provide reasonable assurance that: 

-- Programs achieve their intended results; 
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-- Resources are used consistent with agency mission; 

-- Programs and resources are protected from waste, fraud and mismanagement; 

-- Laws and regulations are followed; and 

-- Reliable and timely information is obtained, maintained, reported and used for 

decision making. 

The concept of reasonable assurance recognizes that the cost of management control 

should not exceed the benefits expected to be gained, and that the benefits consist of 

reductions in the risks of failing to achieve the stated objectives. Estimates and 

judgments are required to assess the expected benefits and related costs of control 

procedures. Furthermore, errors or irregularities may occur and not be detected because 

of inherent limitations in any system of management accountability and control, 

including those limitations resulting from resource constraints and other factors. The 

statement of assurance and determination are based on the following: 

• An independent outside audit of the Finance Board’s financial statements, which 

provided an unqualified opinion and found no weaknesses involving the Finance 

Board’s internal control structure determined to be material. 

• An internal evaluation that included input from senior program and management 

officials and the OIG, covering the period from October 1, 2004, through September 

30, 2005, which found no weaknesses determined to be material and concluded that 

the Finance Board’s management accountability and controls are achieving their 

intended objectives. 

• Comments of the OIG regarding the internal evaluation process and the Finance 

Board’s management accountability and controls. 

The Finance Board is committed to a strong internal control program. The agency 

employs sound financial management techniques; has developed oversight procedures; 

and emphasizes the importance of a strong risk management and internal control program 

to meet its statutory, regulatory and fiduciary responsibilities. 

In last year’s report, the OIG identified the most significant management and 

performance challenge as reducing the security vulnerabilities of the in-house PeopleSoft 

Financial System. To address the challenge, in July 2005, the Finance Board contracted 

with the Department of the Treasury’s Bureau of Public Debt, one of the four Centers of 

Excellence identified by the Office of Management and Budget (OMB), to provide 

financial management and accounting services for the Finance Board. Through this 

partnership, the Finance Board maintains responsibility and oversight of its financial 

activities and reaps the benefits of government-wide best practices. 
PROGRAM PERFORMANCE 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

12 

MEASURING AND REPORTING PERFORMANCE 

This section presents information on the program-specific performance of the Finance Board 

during FY2005. This discussion of performance includes an overview of the agency’s key 

initiatives and some of our major accomplishments. Program-specific performance results 

for Finance Board goals and measures, along with the results of all program evaluations or 

studies completed during FY2005, are also presented. 

PERFORMANCE MEASUREMENT SYSTEM 

The Finance Board’s performance measurement system centers around three strategic goals 

for the agency, as outlined in its FY2003-2008 Strategic Plan. The strategic goals represent 

the agency’s mission and reflect the overall outcomes to be achieved. The Finance Board 

has adopted a number of annual performance goals and accompanying annual 

performance measures that can be used to determine the degree to which the strategic 

objectives, and ultimately the strategic goals are achieved. The performance measures, 

performance goals, and strategic objectives constitute the agency’s performance 

management system. 

The agency will conduct the triennial update of its Strategic Plan and review its performance 

measures in FY2006. The Finance Board is continually endeavoring to determine effective 

ways to measure and report, and ultimately improve, its performance. The update of the 

Strategic Plan during FY2006 will present another opportunity to ensure that the Finance 

Board develops and implements effective practices in performance measurement, reporting, 

and management. 

ALIGNING RESOURCES TO GOALS 

Collectively, the outcome-based performance goals are the key indicators for successful 

progress in achieving the agency’s strategic goals. The performance goals and their 

associated measures reflect the agency’s move toward more outcome-based performance. 

Agency programs and activities are planned, managed, monitored, and assessed according to 

contributions to the achievement of these performance goals, with safety and soundness of 

the FHLBank System as the primary consideration. On-going program evaluations will form 

the basis to identify whether existing programs are successfully achieving the goals or 

whether revised or new initiatives are needed. 

ANNUAL GOALS AND MEASURES 

STRATEGIC GOAL 1: Supervision program effectively fosters safe and sound operations at 

each FHLBank. 
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13 

STRATEGIC GOAL 1 RESULTS: The Finance Board has identified three strategic 

objectives to assist in determining whether the agency has met its safety and soundness 

strategic goal. These measures define the effectiveness of the Finance Board’s oversight of 

the FHLBanks. The goal of the Finance Board’s regulatory efforts is to encourage the events 

described in the objectives below. 

Strategic Objectives 2002 2003 2004 2005 

1.1 The FHLBanks operate safely and 

soundly. 

Achieved Achieved Achieved Achieved 

1.2 The FHLBanks meet or exceed 

their minimum capital requirements. 

Achieved Achieved Achieved Achieved 

1.3 The FHLBanks raise funds 

efficiently, and are role models for 

transparency and accountability. 

Achieved Achieved Achieved Achieved 

ANNUAL PERFORMANCE GOALS

To support its strategic objectives in meeting strategic goal 1, the Finance Board has four 

annual performance goals, each with accompanying performance measures to indicate the 

achievement of those goals. 

Annual Performance Goal 1.1: Maintain an effective risk-based examination program. 

Annual Performance Goal 1.2: Each FHLBank satisfies its applicable capital 

requirements and prudently manages capital and earnings. 

Annual Performance Goal 1.3a: The FHLBanks maintain a triple A credit rating for 

their consolidated obligations. 

Annual Performance Goal 1.3b: Each FHLBank’s and the FHLBank System’s 

financial disclosures comply with applicable laws, rules, and regulations. 

ANNUAL PERFORMANCE GOAL RESULTS 

Annual Performance Goal 1.1: Maintain an effective risk-based examination program.

Annual Performance Measures 2002 2003 2004 2005 

1.1a Conduct all safety and soundness 

activities, including annual 

examinations, quarterly reviews and 

off-site monitoring on a timely basis. 

Achieved Achieved Achieved Achieved 
PROGRAM PERFORMANCE 

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14 

Annual Performance Measures 2002 2003 2004 2005 

1.1b Assess effectiveness of corrective 

actions at annual on-site safety and 

soundness examinations, quarterly 

reviews or more frequently, as 

appropriate.

Achieved Achieved Achieved Achieved 

Annual Performance Measure 1.1a: Safety and Soundness Activities. The Finance 

Board conducted on-site safety and soundness examinations at all twelve FHLBanks. At 

the end of each examination, a “conclusion” was reached for each FHLBank that is based 

upon the level of credit, market, and operational risk undertaken, the adequacy of its risk 

management practices, its financial condition and operating performance, the adequacy of 

its capitalization, the quality of its corporate governance and administration of its 

affordable housing or community investment program. 

In June 2004 and December 2004, the Finance Board entered written agreements with the 

boards of directors of the FHLBank of Chicago and Seattle, respectively. These 

agreements address certain shortcomings with the FHLBanks’ risk management, 

corporate governance and financial condition that were identified by the Finance Board 

through its supervisory program. Both FHLBanks have made progress toward addressing 

the Finance Board’s supervisory concerns, but remain subject to the provisions of these 

written agreements. 

Annual Performance Measure 1.1b: Corrective Actions. During the course of an 

examination, the Finance Board may identify a significant supervisory or compliance issue 

that poses a risk to the FHLBank. When this happens, the Finance Board requires the 

FHLBank to develop a plan to correct the violation or weakness. The Finance Board 

conducts on-site visits at least quarterly at each FHLBank to monitor progress in addressing 

any supervisory findings. Follow-up activities occur more frequently, as needed, such as for 

FHLBanks subject to a written agreement. 

Annual Performance Goal 1.2: Each FHLBank satisfies its applicable capital requirements 

and prudently manages capital and earnings. 

Annual Performance Measures 2002 2003 2004 2005 

1.2a Each FHLBank continuously 

meets or exceeds its minimum capital 

requirements.

Achieved Achieved Achieved Achieved 

1.2b Each FHLBank implements or 

makes progress in implementing its 

capital structure plan.

Achieved Achieved Achieved Achieved 

Annual Performance Measure 1.2a: Capital Requirements. In FY2005, all the 

FHLBanks exceeded their minimum capital requirements. 
PROGRAM PERFORMANCE 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

15 

Annual Performance Measure 1.2b: Capital Structure Plan. In 2002, the Finance 

Board required each FHLBank to submit a plan that established a new capital structure 

for the Bank. Among other things, the structure must satisfy certain minimum capital 

standards and establish the amount of FHLBank stock that must be held by its members 

to ensure that the FHLBank remains in compliance with such standards. The Finance 

Board has approved all the capital structure plans, and to date, ten of the twelve 

FHLBanks have implemented their new capital structure. The FHLBanks of Chicago and 

New York have not yet implemented their new capital plans. The FHLBank of New 

York is expected to implement its new capital structure by the end of calendar year 2005. 

Annual Performance Goal 1.3a: The FHLBanks maintain a triple A credit rating for their 

consolidated obligations. 

Annual Performance Measure 2002 2003 2004 2005 

1.3a Conduct semi-annual assessment of 

FHLBank System cost of funds and 

maintain ratings for consolidated 

obligations and credit ratings at regulatory 

requirements.

Achieved Achieved Achieved Achieved 

Annual Performance Measure 1.3a: FHLBank System Cost of Funds Ratings. The 

FHLBanks raise funds in the capital markets through the issuance of consolidated 

obligations, for which they are jointly and severally liable. The ability of the FHLBanks 

to issue consolidated obligations at rates slightly above the rates on the obligations of the 

U.S. Treasury is important to their ability to efficiently fund their operations. To measure 

the efficiency of the FHLBanks in raising funds, the agency conducted two reviews of the 

FHLBanks’ funding costs relative to those of the U.S. Treasury and other GSEs engaged 

in housing-related activities. 

Collectively, the FHLBanks are required to obtain from a nationally recognized statistical 

rating organization (NRSRO), and at all times maintain, a current credit rating on their 

consolidated obligations. S&P and Moody’s have rated long-term FHLBank 

consolidated obligations “AAA” and “Aaa,” respectively, and short-term consolidated 

obligations “P-1” and “A-1+,” respectively, their highest ratings. Each of the FHLBanks 

has received an individual issuer credit rating of at least “AA” or “Aa,” respectively, the 

second highest such rating awarded by S&P and Moody’s. The credit ratings of the 

FHLBanks and the consolidated obligations were reviewed during the examination 

process for each of the 12 FHLBanks. 
PROGRAM PERFORMANCE 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

16 

Annual Performance Goal 1.3b: Each FHLBank’s and the FHLBank System’s financial 

disclosures comply with applicable laws, rules, and regulations. 

Annual Performance Measure 2002 2003 2004 2005 

1.3b Conduct on-site examination of the 

OF, and review annual and quarterly 

financial reports issued by the FHLBank 

System and each FHLBank.

Achieved Achieved Achieved Achieved 

Annual Performance Measure 1.3b: Examination of the Office of Finance. The Finance 

Board conducts an annual on-site examination of the OF. While on site, examiners: (i) 

follow up on issues identified through pre-examination analysis and planning; (ii) test 

systems, controls, and reports for adequacy and accuracy, including the internal audit 

function; (iii) assess the risk profile and operational soundness; (iv) identify issues that 

may affect the risk or operating profile; (v) evaluate the quality of corporate governance; 

and (vi) test for compliance with laws, regulations, and policies, including sales 

suitability practices by participating underwriters and broker-dealers. The FY2005 

examination of the OF was conducted in December 2004. 

In 2005, each FHLBank was required to file a registration statement covering a class of 

equity securities with the SEC and ensure its effectiveness under section 12(g) of the 

Securities Exchange Act of 1934 (1934 Act). Only two FHLBanks met the deadline for 

registering their securities with the SEC. The remaining FHLBanks must resolve certain 

accounting issues before they can complete the filing process with the SEC and 

subsequently issue audited financial statements. These FHLBanks are required to make 

weekly reports to the Finance Board concerning their progress in completing the SEC 

registration process. In addition, the Finance Board continues to monitor the FHLBanks’ 

filings and communications with the SEC. 

The OF prepares and issues a combined FHLBank System-wide annual report and three 

quarterly financial reports (FHLBank System Combined Reports) using financial 

information submitted by the FHLBanks. The scope, form, and content of the FHLBank 

System financial reports must be consistent with requirements of Regulations S-K and SX of the SEC. Prior to completing the registration process with the SEC, the financial 

statements of each FHLBank must be accepted by the SEC. Six of the 12 FHLBanks are 

in the process of restating their financial statements. Once each of the FHLBanks’ audited 

financial statements are filed with the SEC, the annual FHLBank System Combined 

Report for 2005 will be prepared by the OF. 

STRATEGIC GOAL 2: Ensure that the FHLBanks serve the nation’s housing finance 

and community investment needs. 
PROGRAM PERFORMANCE 

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17 

STRATEGIC GOAL 2 RESULTS: The Finance Board has identified two strategic 

objectives that support strategic goal 2, and define the Finance Board’s responsibilities in 

overseeing the housing finance mission of the FHLBanks. The goal of the Finance Board’s 

regulatory efforts is to encourage the events described in the objectives below: 

Strategic Objectives 2002 2003 2004 2005 

2.1 The FHLBanks facilitate the housing 

finance activities of their members. 

Achieved Achieved Achieved Achieved 

2.2 The FHLBanks support affordable 

housing and promote community 

investment. 

Achieved Achieved Achieved Achieved 

ANNUAL PERFORMANCE GOALS

In addition to the strategic objectives, the Finance Board has two annual performance goals 

for serving the nation’s housing finance and community investment needs: 

Annual Performance Goal 2.1: The FHLBanks adhere to public purpose principles and 

safety and soundness requirements when supporting affordable housing and promoting 

community development. 

Annual Performance Goal 2.2: Perform effective operational risk-based examinations of 

the AHPs at each FHLBank. 

ANNUAL PERFORMANCE GOAL RESULTS 

Annual Performance Goal 2.1: The FHLBanks adhere to public purpose principles and 

safety and soundness requirements when supporting affordable housing and promoting 

community development. 

Annual Performance Measures 2002 2003 2004 2005 

2.1a Advances of each FHLBank are in 

compliance with the FHLBank Act and 

Finance Board regulations. 

Achieved Achieved Achieved Achieved 

2.1b Acquired member assets program 

is responsive to the needs of members, 

and supports the nation’s housing 

finance system. 

Achieved Achieved Achieved Achieved 

Annual Performance Measure 2.1a: Review advances. The FHLBanks make secured 

advances to their members to provide funds for residential housing finance and to provide 

funds to community financial institutions for small businesses, small farms, and small 

agricultural businesses. As part of the annual on-site examination, Finance Board 
PROGRAM PERFORMANCE 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

18 

examiners evaluate the FHLBanks’ advance and collateral policies and practices to 

ensure compliance with the FHLBank Act and Finance Board regulations. Between 

annual on-site examinations, the agency monitors the size and composition of each 

FHLBank’s advance portfolio on a quarterly basis from data submitted by the FHLBanks. 

Also, the FHLBanks must submit a new business activity notice to the Finance Board 

before initiating any new advance activity or accepting collateral that entails new risks. 

The Finance Board examined the advance portfolios of each FHLBank as part of its 2005 

annual on-site examination, and monitored the size and composition of the portfolios on a 

quarterly basis. The annual survey of the types of collateral securing FHLBank advances 

was completed in the third quarter of 2005. All new business activity notices submitted 

by the FHLBanks were also reviewed. 

Annual Performance Measure 2.1b: Review acquired member asset program.

Acquired Member Assets (AMA) is the comprehensive term for programs through which 

the FHLBanks acquire whole, single-family, residential mortgage loans or loan pools 

either by purchasing closed loans or funding loans at time of closing. As part of the 

annual on-site examination conducted at each FHLBank, the Finance Board evaluates 

compliance of each FHLBank’s AMA program and activities with the requirements of its 

regulations. 

In 2005, examiners evaluated AMA programs and program loans as part of the annual 

on-site examination of each FHLBank. The examinations focused on: (1) risk exposures 

to the FHLBanks; (2) purchase or funding of predatory loans, manufactured housing, 

and/or cooperative housing loans; (3) credit enhancement calculation; and (4) data 

collection coding errors. 

Performance Goal 2.2: Perform effective operational risk-based examinations of the 

Affordable Housing Programs at each FHLBank. 

Annual Performance Measures 2002 2003 2004 2005 

2.2a Conduct examinations of the 

Affordable Housing and Community 

Investment Programs at each FHLBank.

Achieved Achieved Achieved Achieved 

2.2b Assess effectiveness of corrective 

actions at annual on-site examinations 

or at periodic reviews.

Achieved Achieved Achieved Achieved 

2.2c Review FHLBank Community 

Lending Plans annually, and FHLBank 

member Community Support Statement 

biennially. 

Achieved Achieved Achieved Achieved 

2.2d Appoint public interest directors, 

including community interest directors to 

board of directors of each FHLBank. 

Achieved Achieved Achieved Not 

Achieved 
PROGRAM PERFORMANCE 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

19 

Annual Performance Measure 2.2a: AHP Examinations. The Finance Board supports 

the affordable housing and community investment objectives of the FHLBank Act by 

maintaining an effective program of annual on-site examinations for the AHP, Community 

Investment Program and, as applicable, other Community Investment Cash Advance 

programs. In FY2005, the Finance Board completed on-site reviews of all FHLBank AHPs. 

On March 15, 2005, the Finance Board issued “The Report of the Horizontal Review of 

the Affordable Housing Programs of the FHLBanks.” Currently, key findings from this 

report are being considered in the revision of the AHP regulation. 

Annual Performance Measure 2.2b: Corrective Actions: During the course of an 

examination, the Finance Board may identify a significant supervisory or compliance issue 

that poses a risk to the FHLBank. When warranted, the Finance Board will require the 

FHLBank to develop a plan to correct the violation or weakness. The EICs hold discussions 

quarterly with the FHLBanks that have outstanding supervisory issues. 

Annual Performance Measure 2.2c: FHLBank Community Lending Plans. Each 

FHLBank is required to adopt an annual community lending plan that requires the 

institution to: (i) conduct market research in its district; (ii) describe the manner in which 

it will address identified credit needs and market opportunities in its district for targeted 

community lending; (iii) consult with its advisory council and its members, housing 

associates, and public and private economic development organizations in its district in 

developing and implementing the plan; and (iv) establish quantitative community lending 

performance goals for that year. The Finance Board also solicits and reviews community 

support statements of each FHLBank member approximately once every two years. The 

Finance Board reviewed the community lending plans for the FHLBanks and reviewed the 

community support statements of 3,170 FHLBank members. 

Annual Performance Measure 2.2d: Public Interest Directors. The FHLBank Act 

specifies that the board of directors of each FHLBank be comprised, generally, of eight 

directors elected by the institution’s members and six directors appointed by the Finance 

Board. At least two of the directors of each FHLBank appointed by the Finance Board 

are required to be chosen from organizations with more than a two-year history of 

representing consumer or community interests on banking services, credit needs, housing, 

or financial consumer protections. The Finance Board, with due consideration of the 

potential conflict of interest inherent in appointing representatives to the boards of 

directors of institutions that the Finance Board regulates has postponed such 

appointments to fill expired terms in 2005. The Finance Board instead has informally 

solicited recommendations from the FHLBanks of qualified persons with skills and 

capabilities that could address any gaps that might exist in their boards of directors. If 

warranted, the Finance Board may make such appointments as are necessary in the 

future, pending adoption of statutory changes to the composition of the FHLBanks’ 

boards of directors, such as those recommended by the Finance Board. 
PROGRAM PERFORMANCE 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

20 

STRATEGIC GOAL 3: Use supervisory, managerial, and legal resources to support 

effective, efficient, and responsive FHLBank supervision, regulation, and housing 

oversight. 

STRATEGIC GOAL 3 RESULTS: The Finance Board has identified two strategic 

objectives in support of this goal. These are top-level objectives that define the Finance 

Board’s success in managing its resources to carry out its mission. 

Strategic Objectives 2002 2003 2004 2005 

3.1 The Finance Board takes appropriate and 

timely regulatory and advisory actions. 

Achieved Achieved Achieved Achieved 

3.2 The Finance Board prudently allocates 

resources to fulfill its mission effectively 

and efficiently. 

Achieved Achieved Achieved Achieved 

ANNUAL PERFORMANCE GOALS

In addition to the strategic goal, the Finance Board has two performance goals for 

management of the Finance Board’s resources: 

Annual Performance Goal 3.1a: Regulations and advisory actions are reviewed, 

revised, and supplemented to ensure relevance, transparency, and issue-oriented 

supervisory guidance. 

Annual Performance Goal 3.1b: Fiscal, physical, and human resources are used 

efficiently and effectively to fulfill the Finance Board’s fiduciary responsibilities. 

PERFORMANCE GOAL RESULTS 

Annual Performance Goal 3.1a: Regulations and advisory actions are reviewed, revised, 

and supplemented to ensure relevance, transparency, and issue-oriented supervisory 

guidance. 

Annual Performance Measures 2002 2003 2004 2005 

3.1a Review, revise and supplement 

Finance Board regulations, where 

appropriate. 

Achieved Achieved Achieved Achieved 

3.1b Respond to new business activity 

notices filed by the FHLBanks within 

60 days. 

Achieved Achieved Achieved Achieved 
PROGRAM PERFORMANCE 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

21 

Annual Performance Measure 3.1a: Regulations. In 2005, the Finance Board continued 

to develop and issue anticipatory, results-oriented supervisory guidance to the 

FHLBanks. Guidance was provided in response to the evolving activities and operations 

of the FHLBanks, developments in the financial markets, and recently identified 

supervisory issues and best practices. In this connection, the agency continued to identify 

and incorporate effective practices in regulatory supervision into its supervisory 

guidance. Supervisory guidance and advisory initiatives undertaken by the Finance 

Board in 2005 are described below. 

Regulatory Initiatives. The Finance Board continued to develop a Data Quality and 

Timeliness Regulation, which will consolidate data reporting requirements from 

individual regulations into a Data Reporting Manual (Data Manual). The first two 

chapters of the Data Manual, addressing call report data and membership data, were 

finalized in FY2005. Additional chapters, including AHP data, will be completed in 

2006. 

The Finance Board is also preparing revisions to its AHP regulation for eventual notice 

and comments. These revisions are designed to enhance the program descriptions, 

remove unnecessary administrative requirements, and simplify the monitoring process 

for affordable housing projects.

Supervisory Guidance. The Finance Board issued Advisory Bulletins which address 

SEC registration of debt; the Affordable Housing Set-Aside Program; regulatory 

reporting under certain accounting standards; standards for management and board 

risk management oversight; and internal market risk models. 

Annual Performance Measure 3.1b: New Business Activity. Finance Board regulations 

require a FHLBank that intends to engage in a “new business activity” to file a notice of 

its intent with the Finance Board. Within sixty days after receipt of a notice that meets 

the requirements of the regulations, the agency responds to the FHLBank. In 2005, the 

Finance Board responded to two of the three new business activity notifications from the 

FHLBanks within 60 days. The third notice was withdrawn by the FHLBank before the 

Finance Board could respond to it. 

Annual Performance Goal 3.2: Fiscal, physical, and human resources are used efficiently 

and effectively to fulfill the Finance Board’s fiduciary responsibilities.

Annual Performance Measures 2002 2003 2004 2005 

3.2a Align budgeted resources with 

projected workloads and business 

priorities.

Achieved Achieved Achieved Achieved 

3.2b Business continuity and 

contingency plans are maintained and 

tested. 

Achieved Achieved Achieved Achieved 
PROGRAM PERFORMANCE 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

22 

Annual Performance Measure 3.2a: Resources. The increasing size and complexity of 

the FHLBanks and the successful mission fulfillment by the Finance Board requires 

continuing augmentation of its staff with high-achieving professionals in various 

disciplines and the maintenance and support of a highly qualified, skilled, and diverse 

workforce. In 2005, the Finance Board hired 35 additional full-time staff, including 16

examiners, 16 other professional, and three administrative or support staff. In addition, the 

Finance Board contracted with the Department of the Treasury’s Bureau of Public Debt 

to provide financial management and travel related services. 

In 2005, the agency continued to enhance its data management and information systems to 

improve data integrity and consistency across the FHLBank System. A risk-exposure data 

standard, which will improve data integrity and consistency across the FHLBank System, 

was developed and shared with the FHLBanks. The standard is under review pending 

feedback from the FHLBanks. In addition, the AHP database is being comprehensively 

restructured to reflect data requirements in the revised AHP regulation. The FHLBanks 

will be able to use the AHP database for reporting purposes by the end of the 2006 calendar 

year. 

The agency’s headquarters relocated to new, leased office space that is fully compliant with 

the Americans with Disabilities Act and other life safety standards. 

Annual Performance Measure 3.2b: Continuity and Contingency Plans. The 

Continuity of Operations Plan (COOP) for the Finance Board is designed to ensure 

continuity of essential Finance Board functions under all emergency circumstances. The 

COOP identifies the essential functions that must be continued under any circumstances, 

and the policy and procedures for activating the program. The major components of the 

COOP include identification of essential functions; delegations of authority; orders of 

succession; communications processes; vital records, files and databases required and 

available during an emergency; and a testing, training and exercise program that includes 

monthly, quarterly and annual testing of the COOP’s different components. 

The COOP was tested in FY2005 through an exercise using established activation 

procedures, requiring all emergency personnel to report to the Emergency Operations 

Center, and testing of programs to ensure that essential functions could be performed. 

The COOP was also updated to comply with recent directives from the Department of 

Homeland Security’s, Federal Emergency Management Agency that were issued as a 

result of government-wide audits and testing. 

PROGRAM EVALUATION 

The Finance Board monitors its progress in implementing its goals regularly through its 

financial accounting and budget system, other internal tracking and reporting 

mechanisms, and internal staff and management meetings. The accounting and budgeting 

system tracks agency costs against budgeted resources for various agency functions. This 
PROGRAM PERFORMANCE 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

23 

allows the efficiency of current agency programs and activities to be considered when 

making allocations of agency resources. The agency’s annual financial statements are 

prepared in accordance with generally accepted accounting principles and are subject to an 

annual audit by an independent accounting firm. 

Audits conducted by the Office of the Inspector General and the U.S. General Accounting 

Office are other means used to determine the quality and effectiveness of agency programs 

and operations. In addition, the effectiveness, clarity, and adaptability of the Finance 

Board’s regulations and their consistency with current agency priorities and objectives is 

assessed through the agency’s ongoing efforts to identify provisions that should be 

amended or eliminated because they are no longer relevant, do not achieve their intended 

purpose, are unreasonably burdensome, or are too complex or ambiguous. 
 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

AUDITOR’S REPORT AND FINANCIAL STATEMENTS 
 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

APPENDICES 
APPENDIX A 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

October 31, 2005 

MEMORANDUM

TO: Ronald A. Rosenfeld 

 Chairman 

 

FROM: Edward Kelley 

 Inspector General 

SUBJECT: Finance Board Management Challenges 

 In accordance with OMB Circular A-136, I am providing my summary of the 

most serious management and performance challenge facing the Finance Board and my 

assessment of the agency’s progress in addressing those challenges. My position is based 

on the audit work we have performed in OIG to date. 

MANAGEMENT CHALLENGE – The primary mission of the Finance Board is to 

ensure the safety and soundness of the Federal Home Loan Bank System whose mission 

is to support affordable housing in the United States. The Finance Board’s regulatory 

success is dependant on the agency’s ability to: monitor the activities of the twelve 

Federal Home Loan Banks and the Office of Finance; timely identify activities that 

threaten their safe and sound operations; and timely take actions to protect the system. 

The agency’s examination and supervisory function has a critical role in helping to 

ensure the success of its mission. However, recent problems that have occurred in 

several Federal Home Loan Banks raise questions as to whether the examination and 

supervisory function: 1) has an adequate number of staff, 2) has staff that possess the 

appropriate knowledge, skills and abilities, 3) has staff that are provided with adequate 

guidance, and 4) has adequate monitoring capability. 

AGENCY PROGRESS – The Finance Board has taken very positive steps towards 

enhancing the examination and supervision functions. The Finance Board has taken 

commendable steps in hiring more examiners. However, we have not assessed the 

effectiveness of the agency’s hiring strategy. The Finance Board has also focused on 

achieving a risk based examination approach. 

 If you have any questions or I can be of any assistance, please contact me at 

extension 2544. 

Federal Housing Finance Board 
APPENDIX B 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

1 

Date: October 27, 2005 

To: Edward Kelley 

Inspector General 

 

From: Stephen M. Cross 

Director, Office of Supervision 

Subject: Response to the Your Memo Regarding the Office of Inspector General 

Survey of the Office of Supervision

This memorandum serves as the Office of Supervision’s response to your October 7, 

2005 memorandum to me regarding the Office of Inspector General’s (OIG) draft report 

on its survey of the Office of Supervision (OS). As you stated in your memo, the survey 

is being used as a basis for the OIG’s decision to conduct six audits of OS’s examination 

process, human resources functions, and promulgation of advisory bulletins. 

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

FHLBanks and the Office of Finance (OF). The examinations focus on the FHLBank’s 

corporate governance, risk profile, risk management, and prudent operating practices 

relating to market, credit, and operational risk. The examinations also check for 

compliance with applicable laws, regulations, and policies. Our examination and 

supervisory responsibilities cover safety and soundness and affordable housing and 

community development. 

I will provide comments concerning each of the six potential audits outlined in your 

memorandum of October 7, 2005. The discussion in this memorandum may assist in 

providing you some perspective and context that was not available during the survey 

process. 

Federal Housing Finance Board 
APPENDIX B 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

2 

I. Risk-Based Examination Focus

When I first arrived at the Finance Board as its Director of Supervision in 2002, we had a 

total of 10 examiners. Examinations at that time were essentially compliance audits. The 

focus of examinations was to determine whether or not the FHLBanks and the OF were 

adhering to applicable laws and Finance Board regulations and policies. Changes to the 

OS were necessary if the Finance Board was to meet its statutory responsibilities to 

ensure that the FHLBanks operate in a financially safe and sound manner. The breadth 

and depth of those necessary changes were substantial. 

It was clear that we needed more good people, and we needed them quickly. We needed 

to shift the focus of our examination and supervision from compliance-based to riskbased. We embarked on an incremental recruiting and hiring strategy to attract 

experienced and appropriately talented people – examiners and non-examiners. We 

shifted the focus of examinations from exception-based compliance audits to full reviews 

of the FHLBanks that focused on the areas of greatest risk facing the institutions. In 

addition to adding people, we needed to make organizational changes to better integrate 

the supervisory process throughout OS. We are now more effective in our supervision of 

the FHLBanks and in taking supervisory actions in response to shortcomings identified 

through the supervisory program. 

Organization 

Over the past three years, we have organized OS around its primary mission of assuring 

the safety and soundness of the FHLBanks and OF and assuring the FHLBanks fulfill 

their affordable housing and community investment responsibilities. We have integrated 

all divisions into the supervisory process. All divisions participate in the examination 

process, and all staff is encouraged to visit the FHLBanks during examinations to gain an 

understanding of how each staff member’s responsibilities contribute to the supervision 

of the FHLBanks. 

For fiscal year 2006, we have continued our efforts to enhance the operation of OS. A 

new management and administration division was established to coordinate and oversee 

our planning, training, and administration. We have also established a policy division, 

which will be the focal point for supervisory and regulatory policy development. 

Staffing 

To enhance the identification and evaluation of the relevant risk exposures of the 

FHLBank System, we have tripled our examination staffing resources. Our recruiting 

focused on hiring experienced professionals with technical knowledge of the banking and 

mortgage markets. This has enabled us to conduct in-depth reviews of high-risk areas, 

e.g., corporate governance, financial accounting, market risk management, acquired 

member assets, information technology, etc. 
APPENDIX B 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

3 

We have increased the number and skills of staff in OS in a manner that is prudent: 

enough to make a meaningful difference in the quality of our supervision and 

examination, while still being “manageable” in any given period. Accordingly, we have 

added from 5 to 12 examiners in each fiscal year’s budget request beginning in FY 2003. 

We have hired only those candidates exhibiting the best combination of education, 

training, experience, and judgment. At times, this has resulted in our having vacant 

positions, but I firmly believe our high standards have been in the long-term best interests 

of the Office of Supervision and the Finance Board. 

At this point, our need for additional examiners has nearly been met. I believe that we 

are approximately at our needed examiner strength level. That is not to say we do not 

have unmet needs or that those needs will not grow in the future. The most pressing of 

our technical needs is for accounting staff. There is a nationwide need for financial 

accountants throughout the private and regulatory sectors, owing in no small part to 

developments associated with accounting for derivatives and increased corporate 

accountability standards imposed by the Sarbanes-Oxley Act of 2002. We are working 

with the Office of Management to determine the best strategies for meeting the need for 

accounting staff. 

Our need for additional examination staff and resources may change in the future. One 

program we are exploring is a “dedicated examiner” program. In a “dedicated examiner” 

program, one or more examiners would be assigned full time to a particular FHLBank. 

Should we institute such a program, we would need additional examination staff. 

The most notable among our staffing changes have been the designation of portfolio 

managers and examiners-in-charge, the establishment of quality assurance positions 

within the director’s division, and the establishment of a training coordinator. Details on 

these changes are provided below. 

Designation of Portfolio Managers and Examiners-In-Charge 

We have set up three teams of examiners, each concentrating on a portfolio of 

four FHLBanks. A portfolio manager leads each portfolio, and an examiner-incharge (EIC) has been designated for each FHLBank. The portfolio manager has 

the responsibility for managing the resources and conducting planning operations 

for that portfolio. The EICs are the central point of contact for all 

communications with the FHLBank and have the responsibility of managing the 

ongoing supervision of his or her FHLBank. The EIC is responsible for being 

aware of and keeping OS management informed about all activities at the 

FHLBank that have a bearing on supervisory and examination matters. The EIC 

is also charged with developing the supervisory strategy for his or her FHLBank. 

These strategies, developed during the fourth quarter of the calendar year, serve as 

the organizing vehicle for the supervision of the FHLBank during the subsequent 

year. 
APPENDIX B 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

4 

During the past year we have added an examination specialist position to each 

portfolio. The examination specialist is a resource for the portfolio manager and 

EICs. These positions have been filled on an “acting” basis during fiscal year 

2005, but they will be filled on a permanent basis in the next 30-45 days. These 

analysts will add another review and assessment of the reports of examination 

prior to their completion and issuance. In that way, the examination specialists 

will provide a level of quality assurance. They will also be tasked with checking 

that the examination work papers are complete at the end of every annual 

examination, assisting in the planning process, helping to develop supervisory 

strategies, and coordinating the supervision for the portfolio of banks. 

Quality Assurance Function 

We have budgeted for two quality assurance staff to be added to the director’s 

cost center this fiscal year. These staff will be charged with leading reviews of 

work papers and supervisory and policy development processes throughout the 

Office, along with broader, more conceptual reviews to ensure that the Office is 

functioning as effectively and efficiently as possible. The quality assurance staff 

in the director’s cost center will serve as project managers for specific quality 

assurance reviews and will be supported by other staff detailed on a temporary 

basis to work with them on specific quality assurance projects. 

Establishment of a Training Coordinator 

We have budgeted for a training coordinator to be hired during the current fiscal 

year. This individual will be responsible for conducting an assessment of the 

specific training needs of OS staff according to their job responsibilities, areas of 

specialization, education, experience, and developmental goals. The creation of 

this position will formalize and bring coordination to our training and 

development. 

Establishment of the FHLBank Analyst Program 

At the end of 2003, we decided to create four new full-time FHLBank analyst 

positions. Prior to this change, the FHLBank analyst responsibilities were parttime collateral duties for certain financial analysts, policy analysts, and 

economists on our staff. These new analysts each have responsibility for 

monitoring developments at their assigned FHLBanks, monitoring the monthly 

and quarterly call reports for the FHLBanks in their portfolios, and conducting 

studies of financial developments affecting the FHLBanks. The FHLBank 

analysts are a dedicated staff with the responsibility to uncover emerging trends 

and bringing these to the attention of the EIC. The analysts also prepare formal 

semiannual “Vulnerabilities” memoranda that identify and analyze the three or 

four areas at each FHLBank that present the most risk to that institution over the 

next six to 12 months. 
APPENDIX B 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

5 

Designation of Specific AHP and Community Investment Examination Staff 

When I arrived at the Finance Board, we had no staff specializing in conducting 

AHP and Community Investment examinations. We now have seven full-time 

AHP and Community Investment examiners. During the last fiscal year, we 

moved our Affordable Housing and Community Investment examiners to the 

Supervision and Examination division, where they have been assigned to work on 

specific portfolios. We are in the process of selecting an AHP and Community 

Investment national expert examiner to coordinate the efforts of the AHP and 

Community Investment examiners across the three portfolios. This national 

expert will aid in ensuring that examinations of these programs are consistent 

across the FHLBanks and respond rapidly and appropriately to emerging issues. 

Beyond staffing-related changes, we have established other practices to ensure that our 

examinations and supervision of the FHLBanks are calibrated to the risks facing the 

FHLBanks and the FHLBank System. Among the changes we have implemented are the 

following. 

“All Hands” meetings 

Since 2003, we have had, at least annually, meetings of all OS staff. These “All Hands” 

meetings are designed to achieve a number of objectives: 

• Provide an opportunity for OS staff to meet OS senior management and other 

OS staff; 

• Provide an opportunity for OS staff to hear the views of outside speakers on 

current topics of interest; and 

• Provide a forum for OS staff to provide input on ways we can improve our 

operations. 

Coordination within the Office of Supervision and with the Office of General Counsel 

As part of the examination process, the portfolio managers and the EICs coordinate their 

reviews with other professionals within the Office of Supervision. These professionals 

have been assigned to be responsible for their areas of expertise at specific Banks, such as 

FHLBank analysts, risk modeling staff, and attorneys from the Office of General 

Counsel. 

The FHLBank Analysis division and the Risk Modeling division have each assigned staff 

to individual FHLBanks. The modelers, like the FHLBank analysts, have certain 

deliverables that are required as part of each annual examination, along with a 

responsibility to provide assistance for quarterly reviews and other on-going supervisory 

matters. Finally, the Office of General Counsel has assigned its attorneys to specific 

FHLBanks, with the responsibility of being a resource to the examination team for 

consultation on legal and regulatory matters. 
APPENDIX B 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

6 

Meetings with external auditors 

The portfolio managers and the examiners-in-charge meet with the external auditors to 

address any potential issues or concerns that may require further review and/or emerging 

issues that should be considered in determining the scope of the quarterly reviews or 

annual examination. 

Supervisory strategies, quarterly visitations, and examination planning 

Each year, examiners-in-charge are required to complete a supervisory strategy that 

identifies key areas of risk at their FHLBanks and addresses the timeframe and the focus 

of the supervision of the FHLBank during the year. The supervisory strategy may change 

based on the results of examinations, quarterly visitations, and coordination with other 

areas within the Office of Supervision, but it serves as a risk-based framework for the 

supervision and examination of the FHLBank. The EIC has the ability, and the 

responsibility, to solicit input from analysts, modelers, accountants, and attorneys when 

planning the supervisory strategy, annual examination, quarterly visitations, and ongoing 

supervision of the FHLBank. The EIC also coordinates supervisory activities with 

financial analysts, accountants, modelers and attorneys as the need arises. 

The EICs also conduct quarterly on-site visitations of their FHLBanks. The scope of the 

visitation includes discussions with executive management on current performance, 

emerging issues and strategies, follow-up on previously reported examination findings or 

other issues and concerns that were identified by the risk modelers and analysts. The 

quarterly visitation is a critical element of the supervisory process. It allows the 

examiners-in-charge to keep current on the risks of the FHLBanks and gives them 

information that may be used to update the supervisory strategy. As appropriate, the 

visitation includes analysts, modelers, accountants, and other staff. 

 

The EICs are responsible for the planning of the annual examination and allocation of 

resources to those examinations. The scope of an examination reflects an assessment of 

the risks and vulnerabilities of the assigned FHLBank. Decisions on examination scope 

are based on information that is obtained on an on-going basis, e.g., quarterly visitations 

and coordination with other functions within OS, meetings with external auditors, and the 

results of prior examinations. 

Examination emphasis 

The examination process requires a thorough assessment of corporate governance, 

internal controls and the independent testing that is performed by the external and 

internal auditors. Examiners are responsible for identifying and evaluating the 

governance objectives, risks, tolerances, processes and internal controls for their assigned 

areas. In completing their assessments, the examiners evaluate: 

• The degree to which the activities and internal controls reflect the goals and 

parameters established by the board and executive management in the 
APPENDIX B 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

7 

corporate governance process, e.g., strategic/business planning, risk 

assessment, risk management policy; 

• The adequacy of internal controls to inform and support the governance 

processes, management, and decision making; 

• The adequacy of governance processes to address all material risks of the 

FHLBank’s activities and risk profile; and 

• The adequacy of independent testing that is performed on the internal control 

environment by the external and internal auditors. 

Communication with FHLBank management 

Throughout the examination, the examiner-in-charge meets with executive management 

to discuss the examination approach and any relevant issues or concerns needing to be 

addressed and/or clarified. Examiners meet regularly throughout the examination with 

FHLBank staff responsible for areas under examination. 

Evaluation of identified findings 

All potential findings are evaluated by the examination team to determine whether the 

issue or concern warrants reporting to senior management and/or the board of directors. 

Examination staff uses the following elements to evaluate potential findings: 

• Criteria – A statement of the standards against which the deficiency is 

measured; 

• Condition/facts – A statement of the condition to demonstrate the existence of 

the deficiency and its materiality; 

• Cause – The probable cause of the deficiency, e.g., weakness in internal 

controls, corporate governance and internal audit coverage; 

• Effect – The potential or actual results that have occurred; and 

• Action – The proposed corrective action. 

Before the submission to FHLBank management and/or inclusion in the Report of 

Examination (ROE), all findings are reviewed by the examiner-in-charge for accuracy 

and materiality. Additional reviews are performed by the portfolio manager and the 

examination specialist. 
APPENDIX B 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

8 

Examination findings and conclusion 

During 2005, the five categories (unsafe and unsound practice or condition, violation, 

weakness, referral, and recommendation) of “Findings” that were used in the ROE were 

revised, and an overall conclusion (satisfactory, fair, marginal, or unsatisfactory) was 

introduced. This has enhanced the consistency of the examiners’ communications with 

FHLBank boards of directors and senior managers regarding the level of supervisory 

concern about the FHLBank’s activities and the risk profile of the FHLBank. 

 

II. Revision of the examination manual

In September 2003, we began our efforts to revise the examination manual. The purpose 

behind those revisions is to establish risk-based work programs to provide a clearer 

understanding of each FHLBank’s risk profile, a more risk-focused examination process, 

and a more risk-based focus on the review of corporate governance, internal controls, and 

the independent testing performed by the external and internal auditors. 

The revision of our examination manual has been an ongoing process for at least two 

years. While I expect an initial draft of the revised safety and soundness portion of the 

manual to be released by the end of the calendar year, I am not at all satisfied with the 

delays in this project’s completion. Owing to the delays with this project, and the fact 

that the existing examination manual has not been risk focused, I have given our 

examiners the authority to use their judgment in adopting examination manuals from 

other agencies, principally the Office of the Comptroller of the Currency and the Federal 

Deposit Insurance Corporation, as they are more risk-focused than is our 1998-era 

examination manual. The percentage of OS staff using the examination manual will 

increase once the new manual is released. 

It is important to understand that an examination manual is a guide, not a “cook book,” 

for conducting examinations. FHLBank practices change and evolve with emerging 

technologies, industry practices, supervisory and regulatory guidance, and market forces. 

The ongoing evolution of the financial industry dictates that an examination manual be a 

living document and that examiners not rely solely on a manual in his or her review of 

FHLBank operations. We have hired experienced examiners because they bring their 

best judgment to bear when presented with novel situations. One cannot examine a 

complex financial institution with assets of $45 to $200 billion using a punch list. 

Also, while the FHLBanks and the OF may find it useful to see our examination manual 

to get insight at the way we conduct our examinations, the manual is not produced for the 

FHLBanks nor for OF. It is produced for use by OS staff. The FHLBanks and the OF 

will have access to the examination manual, but they should not be relying on the 

examination manual for direction as to how to conduct their operations. 

The AHP and Community Investment portion of the revised manual will follow the now 

in-process revision of the Affordable Housing Program regulation. Preliminary work is 

beginning. 
APPENDIX B 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

9 

III. Call Report System 

We are in the process of planning revisions of the Call Report System (CRS) to ensure 

that it will remain accurate, up-to-date, and capable of reporting the type of information 

necessary to continue our oversight, supervision, and examination of the FHLBanks. 

This revision process is being coordinated with the Office of Finance’s implementation of 

its Financial Reporting System (FRS). That said, we have not been silent on the need for 

the FHLBanks to submit timely and accurate data to CRS. The existing system has 

extensive “edit checks” that do not permit submission of data that fail any check. In 

addition, in 2003, we issued Advisory Bulletin 03-13, which, among other guidance, 

advised the FHLBanks that “[S]ubmission of late or inaccurate call reports may lead to 

subsequent supervisory actions by the Finance Board...” That advisory bulletin set forth 

the regulatory deadlines for the submission of the monthly and quarterly call reports. In 

addition, in 2004 and early 2005 we worked with the Office of General Counsel and 

proposed changes to our regulations to improve our information collection authorities. 

The current call report is used both for supervisory purposes and by the Office of Finance 

to prepare the combined financial report. There are many items in the call report that are 

principally or exclusively used by the Office of Finance. In both designing and updating 

the existing call report system, the process has sought input of the FHLBank 

comptrollers. As a group, the comptrollers are slow to make decisions, and have changed 

their decisions about the presentation and “geography” of several items related to 

Statement of Financial Accounting Standards No. 133. I would note, however, that the 

Finance Board now has the capability in-house to make call report changes much more 

rapidly than when it had to rely on a contractor for this purpose. As a recent example, the 

call report changes required to incorporate Statement of Financial Accounting Standards 

No. 150 were implemented in a very timely fashion, contrary to the representation in the 

draft OIG report of its survey of the OS. 

IV. Early Warning System

Our approach to risk modeling has not been the development of an “early warning 

system” per se, but rather an effort to ensure, as with other supervisory programs, that we 

can evaluate the competence of the FHLBanks’ risk modeling and risk management 

systems and staff. The risk management models in the FHLBanks are used by the 

FHLBanks to measure and assist in managing interest-rate risk. Our approach has been 

to independently value specific instruments at each FHLBank and compare those 

valuations with those generated by the FHLBank model. We use these independent 

valuations, along with reviews of overall FHLBank modeling technologies, structures, 

assumptions, and extensive discussions with FHLBank modeling staff, to form our 

ultimate conclusion as to the degree of confidence we place in FHLBank modeling and 

risk measurement. 

Beyond models, we have three processes in place for early warnings. First, the EIC visits 

the respective FHLBank no less frequently than once per quarter. Second, the FHLBank 

analysts are charged with uncovering emerging trends at specific FHLBanks and 
APPENDIX B 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

10 

throughout the FHLBank System. Third, we devote considerable attention and analysis 

to the ratio of the market value of equity to the book value of equity (MVE/BE). We 

believe this ratio is a reliable indicator of future profitability at an FHLBank. 

V. Advisory Bulletins

An important tool for us to influence the risk-taking activities of the FHLBanks is the 

issuance of supervisory guidance in the form of advisory bulletins. Our approach to 

developing advisory bulletins has been, and will continue to be, an inclusive one that is 

more often than not the result of observations and analysis of FHLBank operations. 

Advisory bulletins constitute guidance to the FHLBanks and to our examiners that 

outline what our examiners will be looking for on a given matter or issue. During its 

annual examination, the FHLBank may offer to Finance Board examiners its rationale for 

deviating from guidance offered in an advisory bulletin. 

An example of the development of one advisory bulletin will illustrate how advisory 

bulletins are not developed in a vacuum. During the year before the issuance of AB-03-

08, which stressed the need for FHLBanks to develop capital management and retained 

earnings policies, our examination findings were critical of the low level of retained 

earnings at the FHLBanks. We were critical of the fact that dividends represented a 

priority over retained earnings, and the safety and soundness implications of this 

prioritization. During an FHLBank directors’ conference, I delivered a presentation on 

this topic, and, during that presentation, I alerted them to the upcoming advisory bulletin 

on retained earnings. 

More substantively, our advisory bulletins provide guidance, but do not establish 

regulatory requirements. For example, the aforementioned advisory bulletin on retained 

earnings does not set a prescriptive minimum level for retained earnings at the 

FHLBanks. Rather, it stresses that the FHLBanks should develop policies that guide 

their overall capital management, and set an appropriate level of retained earnings given 

the risk profile of the institution. We also stressed the need for appropriate analytical 

support for whatever capital management, retained earnings, and dividend policies the 

FHLBank implemented. 

While the specific circumstances may differ depending on the guidance provided, the 

standard process for developing and issuing advisory bulletins is similar to the specific 

one described above. We normally give the FHLBanks an opportunity to hear about 

issues addressed in forthcoming advisory bulletins and the reasoning for them. However, 

regardless of FHLBank or staff opinion, it would be inappropriate to get the “approval” 

of the FHLBanks before issuing an advisory bulletin. Advisory bulletins set supervisory 

guidance and serve as a vehicle to ensure that supervisory expectations are fully 

transparent. The Finance Board is the FHLBanks’ regulator, and the Finance Board has 

an obligation to act independently and proactively to issue advisory bulletins that are 

constructive and foster the safe-and-sound operations of the FHLBanks or prompt the 

FHLBanks to better fulfill their housing finance mission. 
APPENDIX B 

 FY2005 PERFORMANCE AND ACCOUNTABILITY REPORT

11 

If necessary, we are prepared to amend advisory bulletins after their issuance. That 

typically would happen as we learn about implementation or other issues that we did not 

contemplate when the bulletins were issued. Each advisory now lists one or more 

principal contacts so that the FHLBanks or other interested parties can obtain 

clarifications or offer comments on an advisory bulletin following publication. While we 

have, on occasion, had useful conversations as a follow-up to the issuance of such 

guidance, we have not had to substantively amend an advisory bulletin in response to 

comments received. 

VI. Training

As noted above, we plan to post a training coordinator position in the next few months. 

Each year during the budget planning process, each person on the staff is asked to 

indicate the nature and extent of training that he or she would like to take in the 

upcoming fiscal year. Taking this information into account, OS prepares a training 

budget. While I cannot say that every training request is granted, the vast majority of 

requests are indeed granted. It is the responsibility of each person in OS to be proactive 

in (1) assessing his or her training needs and (2) presenting a proposal for training 

courses to meet those needs. In the three years I have been the OS director, we have 

never exhausted our training budget. The funds are there to meet reasonable training 

requests. 

Conclusion

I appreciate the opportunity you provided to read the Office of Inspector General’s draft 

report on its survey of the Office of Supervision. I share your commitment to riskfocused examination and supervision, an up-to-date system of supervisory guidance and 

controls for our work, enhancements to the call reporting system, and off-site monitoring 

programs. I also share your commitment to training. 

Your survey did not include the senior management of the Office of Supervision. 

Consequently, your survey may not have surfaced the many steps that we are taking to 

enhance supervision, make examinations more risk-focused, enhance our examination 

manual, improve call reports, anticipate emerging risks, issue appropriate supervisory 

guidance, and offer training to our staff. I offer this memorandum, therefore, to provide 

you with a perspective and context that may not have been considered during that survey 

process, which I hope can enhance your audit planning.