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Office of Finance 31 Located in Reston, Virginia, the Office of Finance does not have significant assets and expenses, and these items are proportionally allocated to the FHLBanks. The Office of Finance’s primary function is to serve as the central issuer of debt on behalf of the 11 FHLBanks. All debt issued by the Office of Finance represents the joint and several liability of all FHLBanks in the FHLBank System. Additionally, the Office of Finance prepares and distributes the quarterly and annual combined financial reports for the FHLBanks and facilitates various FHLBank System-wide initiatives and working groups. During 2015, the FHLBank System issued $304.3 billion in long-term consolidated obligation bonds, reflecting a 12.7 percent decrease from the prior year. The FHLBanks continued to move toward shorter-term funding in 2015. As a result, discount note issuance increased from $1.37 trillion at year-end 2014 to $1.75 trillion at year-end 2015. Overnight discount notes outstanding decreased from an average of $10.4 billion in 2014 to an average of $7.2 billion in 2015. The Office of Finance’s board includes five independent directors and each of the FHLBank presidents and CEOs. Because of the 2015 merger of the FHLBanks of Seattle and Des Moines, the total number of directors on the Office of Finance board decreased to 16 from 17. At the time of its January 2015 examination, FHFA concluded the Office of Finance’s overall condition and operations were satisfactory. Although the examination identified a number of matters requiring management and the board’s attention, the concerns are correctable in the normal course of business. The examination identified weaknesses in the Office of Finance’s dealer compliance program, discount note monitoring, risk control selfassessment process, internal audit program, vendor management oversight, and other internal control deficiencies. FHFA also recommended further enhancements to the organization’s succession planning process. 31 This summary reflects conclusions made at the time of FHFA’s 2015 examination of the FHLBank of Seattle supplemented by year-end financial information. 42 FEDERAL HOUSING FINANCE AGENCY
SUPERVISION AND OVERSIGHT Results of Stress Tests Under the Dodd-Frank Wall Street Reform and Consumer Protection Act Summary Section 165(i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) requires certain financial companies with total consolidated assets of more than $10 billion, and which are regulated by a primary federal financial regulatory agency, to conduct annual stress tests to determine whether the companies have sufficient capital to absorb losses and support operations during adverse economic conditions. Dodd-Frank Act stress testing is a forward-looking exercise that assesses the impact on capital levels that would result from immediate financial shocks and nine quarters of adverse economic conditions. Beginning in 2014, FHFA required the Enterprises and the FHLBanks to conduct stress tests pursuant to the Dodd- Frank Act. The 2015 stress tests were based on the regulated entities’ portfolios as of September 30, 2014. The assessment period for the Dodd-Frank Act annual stress tests covered nine quarters, beginning with the fourth calendar quarter of 2014 through the fourth calendar quarter of 2016. The regulated entities were required to submit the results of stress tests based on three scenarios: a Baseline scenario, an Adverse scenario, and a Severely Adverse scenario. The Baseline scenario reflects moderate expansion in economic activity in the United States, with nominal house price appreciation of 6 percent over the planning horizon, a modest decline in unemployment, and a moderate rise in mortgage interest rates. The Adverse scenario reflects a mild recession in the U.S., with a 13 percent decline in house prices, a rise in unemployment and core inflation, and rising mortgage interest rates. The Severely Adverse scenario reflects a deep and prolonged recession in the U.S., with a 25 percent decline in house prices, a significant rise in unemployment, and a declining interest rate environment, although mortgage interest rates increase. FHFA aligned the stress test scenario variables and assumptions with those used by the Board of Governors of the Federal Reserve System (Federal Reserve Board) in its annual Dodd-Frank Act stress tests. Similar to the stress testing assumptions used by the Federal Reserve Board for the Adverse and Severely Adverse scenarios, FHFA required the regulated entities to apply a global market shock to securities and other assets held at fair value. The assumed result of the global market shock was an instantaneous loss and reduction of capital in the first quarter of the planning horizon. The regulated entities were also required to incorporate a counterparty default scenario involving an instantaneous and unexpected default of their largest counterparty across securities lending, repurchase/reverse repurchase agreements, and derivative exposures. The result of the counterparty default scenario was reflected in the stress test as an instantaneous loss and reduction of capital. 2015 Stress Test Results for the Severely Adverse Scenario FHFA, acting in its capacity as conservator, published the results of the Severely Adverse stress tests of Fannie Mae and Freddie Mac on April 30. The FHLBanks published their results between July 15 and July 30. Fannie Mae – In the Severely Adverse scenario, Fannie Mae projected additional draws from the Treasury Department of between $34.2 billion and $94.9 billion depending on the treatment of deferred tax assets. As of REPORT TO <strong>CONGRESS</strong> • 2015 43
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