At its regularly scheduled meeting last month, the Cincinnati FHLBank Board of Directors concluded that it is in the best interest of its shareholders and the public they serve to retain the present independent regulatory structure for the FHLBanks. The structure and performance of the Finance Board has resulted in 12 healthy, AAA-rated regional FHLBanks that currently support $500 billion worth of credit activity, serving virtually every neighborhood in America. The Finance Board's independence alleviates political and department-specific affiliations that may bias its oversight function. The current post-FIRREA Finance Board has presided over the most expansive and prosperous period of FHLBank history against a backdrop of extreme volatility in the market place. During this time, each FHLBank has maintained a AAA rating and continued the 71-year tradition of never having experienced a loan loss. The current Finance Board Chairman has more than doubled supervisory staff to 17 examiners and has budgeted for a total of 30. Further, the structure of the Finance Board allows for safety and soundness as well as mission oversight of the $1.7 billion Affordable Housing Program and multi-million dollar community investment programs to fall under one regulatory roof. This independent, comprehensive regulatory structure tailored for the System works, and works well. At the same time the Cincinnati FHLBank Board of Directors affirmed its support of our independent regulator, it also directed management to begin immediately the process of registering its stock under Section 12 of the Securities and Exchange Act of 1934. This statement of direction came after preliminary meetings with SEC officials to discuss issues arising from the unique nature of the FHLBanks and the equity shares held by its members. The Cincinnati FHLBank strongly believes that registration of stock with the SEC is the best method to provide both bond and stock investors the necessary financial information they require to assess the condition of our FHLBank. Some critics of the current regulatory structure have argued that the FHLBanks will be disadvantaged in their funding decisions if their regulator operates outside of the Treasury Department. While we appreciate that position, we do not share it. In fact, at the present time the debt issued by the FHLBanks trades at a premium relative to other GSEs. We are confident the financial markets will continue to recognize that the FHLBank System consists of financially sound and conservatively managed, well capitalized institutions whose primary goal is to serve its housing finance mission through its members. This current position will be further strengthened with SEC registration. Conclusion The FHLBanks are strong, conservatively run enterprises without a single credit loss in their 71-year history. There is no problem in need of a solution. The System's current independent regulator is best positioned to provide both safety and soundness as well as mission oversight for our cooperative enterprise. Mr. Chairman, thank you for the opportunity to address the Committee on this important matter. I will be happy to answer questions at the appropriate time. Testimony of John T. Korsmo, Chairman, Federal Housing Finance Board, Before the House of Representatives' Committee on Financial Services Washington, D.C. September 25, 2003 Testimony of John T. Korsmo, Chairman, Federal Housing Finance Board, Before the House of Representatives' Committee on Financial Services Good morning, Chairman Oxley, Ranking Member Frank, and distinguished members of the Committee. Thank you for inviting me to be part of this panel today on H.R. 2575 and the Administration's proposals regarding government sponsored enterprises. Over the past year and a half, my colleagues and I at the Federal Housing Finance Board have undertaken a disciplined, continuing, and, I believe, successful effort to improve the agency's supervision and regulation of the Federal Home Loan Banks. This process has been instructive, providing many lessons that I believe may be of value to you as you consider the best ways to strengthen government sponsored enterprise (GSE) oversight. Allow me to highlight several of these lessons. First, a GSE safety and soundness and mission regulator should today - and for the foreseeable future - concentrate on understanding and keeping pace with the rapidly evolving mortgage finance sector. Second, a GSE safety and soundness and mission regulator should have specialized knowledge of the business and risks of the enterprises it supervises. Third, a GSE safety and soundness and mission regulator must guard its independence in establishing standards and in conducting examinations so as not to revert to a failed model of mixing supervision duties with other mandates. Fourth, a GSE safety and soundness and mission regulator should possess all the tools and enforcement authority granted to commercial bank and thrift regulators. And, finally, a GSE safety and soundness and mission regulator's effectiveness is enhanced by exemption from the appropriation process, allowing it flexibility to determine and structure its budget based on the primacy of safety and soundness. The Finance Board has learned these lessons as a result of its efforts to build a stronger, more capable regulator for the Federal Home Loan Banks. We have been fortunate in that the Federal Home Loan Bank Act affords the Finance Board the prerogatives and authority required to build a truly world-class, arm's length regulator for the Banks. I believe the fast progress my Finance Board colleagues and I have made in increasing the capacity and sophistication of the agency's supervision staff demonstrates the Finance Board is well on the way to becoming just such a regulator. Mr. Chairman, members of the committee, I respect the responsibility of the Congress to take aggressive steps to foster strong, independent regulation of both Fannie Mae and Freddie Mac and the Federal Home Loan Banks, and it goes without saying I will support whatever policy Congress adopts in this regard. Given the progress we have made at the Finance Board and the very different charters, ownership and capital structures, and business models of the Banks as compared to the other housing GSES, however, I believe the Finance Board is achieving the goal of providing effective, efficient, and independent regulation of the Federal Home Loan Banks. Moreover, I believe it is critical that significant enhancements now underway not be lost or deferred in transition to any new regulatory regime at a time when the 12 Banks are entering a far more demanding risk-management environment. IMPROVEMENTS IN SAFETY AND SOUNDNESS OVERSIGHT For most of their history, the Federal Home Loan Banks were overseen by the Federal Home Loan Bank Board. That agency had a mixed mandate to help operate the Banks, to regulate the Banks' owners - federally insured thrifts- and to promote the Federal Home Loan Banks and thrifts. Congress sorted out this puzzle with the passage of the Financial Institutions Reform Recovery and Enforcement Act (FIRREA) in 1989. Nevertheless, in a 1998 report, the General Accounting Office (GAO) found that the Federal Housing Finance Board - nine years after its creation - remained inadequately focused on safety and soundness supervision and too closely involved in operating the Banks, and at times appeared to be a cheerleader for the Banks, rather than an arm's length regulator. Upon becoming chairman in December 2001, I quickly determined these problems still existed and had to be corrected for the Finance Board to effectively oversee the Federal Home Loan Banks and Office of Finance for safety and soundness and achievement of their housing finance mission. Just one example demonstrates this point: At the time of my appointment, the Finance Board had only eight bank examiners on staff to review and supervise a dozen financial institutions with, at the time, more than $700 billion in assets, more than $30 billion in capital, and some $650 billion in outstanding debt. Yet, at the same time, the agency also had eight people in its Office of Public Affairs. The relative allocation of resources simply did not meet the agency's statutory mandates. In addition to being understaffed, the examination function insufficiently focused on the Banks' risk assessment processes and the Banks' internal control systems. Such shortcomings had been identified in the 1998 GAO report on the Finance Board's examination program. These circumstances called for an immediate and vigorous response, beginning with the recruitment of new leadership for the agency's Office of Supervision. Following a national search, the Finance Board has in place a new director and a new deputy director |