On August 19, the OIG for the FHFA released a report evaluating the agency’s supervision of FHLBanks following the issue of four member banks during spring 2023. The report summarized four findings: (i) the FHFA has not issued written guidance for FHLBanks on subordinating members’ collateral when members seek discount window funding; (ii) the FHFA did not have internal guidance on cross-regulator coordination; (iii) the FHFA has not revised certain examination guidance since 2014; and (iv) the FHFA management lacks an approach to ensure examiners review all topics covered by examination guidance. The evaluation covered examination activities from January 1, 2021, to September 30, 2023, and noted weaknesses in the FHLBanks’ lending philosophies, credit policies, risk assessments and modeling.
To remedy these findings, the report made four recommendations. First, the report recommended that the Division of Federal Home Loan Bank Regulation (DBR) issue written guidance on FHLBanks’ collateral subordination practices. Second, the report urged the DBR to develop and implement protocols for DBR personnel to follow in times of member bank distress and failure. The protocols should include heightened oversight of FHLBanks and coordination with federal and state regulators.
Third, the report called for the FHFA to update the Examination Manual’s Credit Risk Management module and the Advances and Collateral module to incorporate lessons learned from the spring 2023 bank issues. Fourth, the report recommended DBR adopt a process to ensure appropriate examination coverage of all topics within its Examination Manual guidance. The FHFA agreed to all recommendations and committed to implementing corrective actions by 2025.
