U.S. Home Loan Banks Overexposed in Europe, Audit Finds

The U.S. Federal home loan banks' unsecured lending to foreign institutions dramatically last year when the European sovereign debt crisis intensified, raising concerns about their risk, an auditor's report said today.Federal Housing Finance Agency, which oversees the 12 regional home loan banks should tighten limits on such lending and improve the monitoring of whether the loan exceeds the limits, the FHFA's Office of Inspector General said in the report."FHFA current regulations continue to allow the FHLBanks to build large unsecured credit portfolios, which may cause undue risk," wrote Richard Parker, director of the auditor's office of policy, supervision and review. "FHFA should reassess counterparty risk limits in relation to the existing system."More Home Loan Bank last year made short-term loans totaling about $ 3 billion to two European banks that received government bailouts and was on a credit watch, according to the report.Federal home loan banks' unsecured lending to foreign banks peaked in april 2011 on $ 101 billion before falling to 41 billion dollars by the end of the year, the audit found.In a written reply, said Stephen M. Cross, Deputy Director of FHFA division of the Federal Home Loan Bank Regulation, the unsecured foreign loans had fallen in response to increased FHFA oversight. "Nevertheless, underwriting of FHLBank credit domestic offices of foreign-owned counterparts were and are a concern for the FHFA," he wrote.Providing liquidityHome Loan Banks were chartered by Congress in 1932 to provide liquidity to the U.S. mortgage market. Banks are also allowed to make secured loans to foreign and domestic financial institutions to raise revenues according to their congressional charters.The FHFA failed to notice that some banks had made loans exceeding regulatory limits, the Office of Inspector General said. In one case, not an unidentified Home Loan Bank by means of a manual evaluation system to note that a borrower had been subject to a credit-rating downgrade, auditors found.FHFA officials described the Agency's rules for unsecured loans as "outdated and overly permissive," according to the report."Even when an FHLBank operates within the established limits may accumulate such large unsecured credit exposure that has been the source of great regulatory concern," auditors found.New RulesThe regulator plans to issue new rules for unsecured loans in april next year, Parker said in his written response to the audit.The amount of unsecured loans, especially to foreign institutions, increased in part to compensate for a decline in home loan banks' traditional business of providing support to domestic lenders for mortgages, according to the report.


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