The proposed charge does not reflect the risk for which it is designed to address. Thus, it would neither encourage good risk management nor provide proper capital backing. The most effective supervisory control of operational risk is strict review during on-site examinations of a FHLBank s preparation for unanticipated problems. This provides the FHLBanks with an incentive to address operational risk in order to achieve the lower capital charge. Capital Charges for Advances .
ABA continues to support lower capital charges for the credit risk of advances than is proposed.
In particular, we request that the charge should not rise with the maturity of the advance. Higher capital charges encourage a FHLBank to make fewer longer-term advances or else price them higher. This result conflicts with the primary, historic mission of the FHLBanks to fund long-term home mortgages. No FHLBank has lost a single cent on advances in the 68-year history of the program, there are substantial haircuts on the collateral backing advances, and every advance is additionally backed by the borrower s capital in the FHLBank. For all of these reasons, ABA believes that the capital charges for all advances should be lower and urges the FHFB to amend the rule to reflect the facts of the FHLBank System, not the theory proposed by Wall Street.