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Figure 8 • Market Value of Equity-to-Par Value of Capital Stock by Various Interest-Rate Changes Parallel Interest Rate Change in Basis Points -200 -100 -50 0 50 100 200 Boston 135 141 143 143 143 141 137 New York 127 122 122 122 122 122 121 Pittsburgh 135 129 128 128 128 128 127 Atlanta 141 137 137 137 136 135 131 Cincinnati 104 109 110 109 109 107 104 Indianapolis 156 158 156 154 152 151 146 Chicago 262 259 257 256 255 254 253 Des Moines 110 114 115 117 117 117 116 Dallas 154 149 149 150 150 149 147 Topeka 177 176 173 171 171 171 168 San Francisco 217 205 202 200 197 195 190 Some FHLBanks with significant mortgage holdings hedge the market risk by extensive use of callable bonds to fund those assets. Other FHLBanks use more complicated hedging strategies that involve interest-rate swaps, swaptions (options to enter into interest-rate swaps), and options. FHLBanks with floating-rate MBS with embedded interest rate caps tend to use interest-rate caps (a type of derivative) to hedge these positions. The FHLBanks are also exposed to “basis risk,” which arises when the index for a floating-rate asset does not move identically with the index for the supporting floating-rate liability. Different movements of the two index rates will lead to a widening or narrowing of the spread or “basis” between the yield on the asset and the cost of the associated liability. The FHLBank System’s market value of equity, which is the estimated market value of the FHLBank System’s assets less the market value of its liabilities, is an important indicator of the FHLBanks’ ability to redeem or repurchase stock at par. Because all stock transactions occur at the par value of $100 per share, the market value of an FHLBank’s equity should equal or exceed the par value of aggregated FHLBank shares of capital stock. The aggregate market value ratios of the FHLBanks were again strong in 2015, highlighting their generally sound financial condition. Market value of equity was 142 percent of the par value of capital stock at year-end 2015, roughly unchanged from 2014. All FHLBanks had market values greater than the par value of their capital stock, indicating their ability to exchange capital stock at par without adversely affecting other members. To measure the sensitivity of the market value of equity in a changing interest rate environment, Figure 8 shows the ratio at each FHLBank at year-end 2015 and the estimated change to the ratio in certain interest rate change scenarios. These scenarios are based on model results provided by the FHLBanks and restrict interest rates to non-negative values. Most FHLBanks show only modest changes in these interest rate scenarios. The largest increase is 17 percentage points in a down 200-basis point scenario at the FHLBank of San Francisco, and the largest decrease is a 10 percentage point decline in an up 200- 26 FEDERAL HOUSING FINANCE AGENCY
SUPERVISION AND OVERSIGHT basis point scenario, also at the FHLBank of San Francisco. All FHLBanks report ratios above 100 percent in all 6 ratechange scenarios. Risk measurements such as these are estimates based on models. Uncertainty about private-label MBS adjustments related to market risk metrics, prepayment speeds, and the effects of extremely low interest rates at short maturities, all contribute to model risk at the FHLBanks and, therefore, to the uncertainty about these estimates. Operational Risk – The FHLBanks engage in financial transactions that require financial models, technological resource systems, ledger accounting systems, and other processes that inherently expose them to operational risks. While operational risk management was generally adequate, FHFA had supervisory concerns at some FHLBanks. At these and other FHLBanks, examiners identified areas that exhibited or could exhibit unacceptable operational risks in areas such as inventory tracking, IT security, IT migration planning, vendor management, and business continuity. The internal control of user-developed applications, such as spreadsheets, is also a concern at some FHLBanks. FHLBank Directors’ Compensation and Expenses – The FHLBanks are governed by boards of directors ranging in size from 14 to 29. The majority of directors of the FHLBanks are officers or directors of member institutions with the remaining (at least 40 percent) being independent directors. Independent directors must reside in the FHLBank district for which they serve. They cannot be officers of a FHLBank or directors, officers, or employees of a member of the FHLBank on which they serve as directors. The Office of Finance (OF) has a different board structure, with five independent directors plus the FHLBank Figure 9 • 2015 Annual Maximum Compensation for Federal Home Loan Bank Directors Chair Vice Chair Audit Committee Chair Other Committee Chairs Directors Atlanta $ 95,000 $ 90,000 $ 90,000 $ 85,000 $ 75,000 Boston $ 85,000 $ 72,500 $ 72,500 $ 72,500 $ 65,000 Chicago $ 90,000 $ 80,000 $ 80,000 $ 75,000 $ 70,000 Cincinnati a $ 105,000 $ 95,000 $ 89,000 $ 86,500 $ 72,500 Dallas b $ 87,500 $ 82,500 $ 77,500 $ 67,500 $ 60,000 Des Moines c $ 95,000 $ 90,000 $ 85,000 $ 80,000 $ 70,000 Indianapolis $ 115,000 $ 92,500 $ 92,500 $ 87,500 $ 77,500 New York $ 105,000 $ 90,000 $ 90,000 $ 90,000 $ 80,000 Office of Finance d $ 130,000 – $ 104,000 – $ 85,500 Pittsburgh $ 112,500 $ 92,500 $ 92,500 $ 92,500 $ 80,000 San Francisco e $ 100,000 $ 95,000 $ 90,000 $ 90,000 $ 75,000 Seattle f $ 70,000 $ 65,000 $ 65,000 $ 60,000 $ 55,000 Topeka $ 105,000 $ 90,000 $ 90,000 $ 90,000 $ 80,000 Average $ 99,615 $ 86,250 $ 86,038 $ 81,375 $ 72,962 Median $ 100,000 $ 90,000 $ 90,000 $ 85,750 $ 75,000 a Directors who are members of the Audit Committee receive an additional $9,500 and members of the Financial and Risk Management Committee receive an additional $7,000. b The Chair of the Risk Committee receives $77,500. c The Chair and Vice Chair of the pre-merger FHLBank Des Moines also received $50,000 and $25,000, respectively, for contributions to the merger and consistent with the approved Directors Compensation Policy. d The Vice Chair and “Other Committee” Chairs at the OF are held by FHLBank presidents who do not receive compensation for their OF director positions. Compensation paid to all directors in 2015 reflected payments which would normally have been reflected in 2016 due to a transition to a new structure for 2016. e Members of the audit committee receive an additional $5,000. f The Chair of the Compliance Committee receives $65,000. REPORT TO <strong>CONGRESS</strong> • 2015 27
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A P P E N D I X : H I S T O R I C A
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Table 1b. Fannie Mae Purchases of M
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Table 3. Fannie Mae Earnings A P P
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Table 4a. Fannie Mae Total MBS Outs
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Table 5a. Fannie Mae Mortgage Asset
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End of Period Manufactured Housing
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Table 6. Fannie Mae Financial Deriv
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Table 8. Fannie Mae Mortgage Asset
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Table 10. Freddie Mac Mortgage Purc
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Table 13. Freddie Mac Balance Sheet
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Table 16. Freddie Mac Nonmortgage I
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Table 18. Freddie Mac Capital a A P
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Table 22. Federal Home Loan Banks A
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Table 24. Loan Limits A P P E N D I
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Federal Housing Finance Agency KEY
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