On September 27, the FHFA published Advisory Bulletin AB 2024-03 which provided guidance to FHLBanks on establishing and maintaining a member credit risk management framework. The bulletin highlighted the importance of FHLBanks’ underwriting and credit decisions being based on a member’s financial condition rather than relying on the collateral securing the member’s credit obligations. The guidance was divided into four key components to ensure sound credit risk management practices.

Credit risk governance: Requires the board of directors or a designated board-level committee to approve policies that ensure staff appropriately assess and manage member creditworthiness. The FHFA suggested these policies must emphasize that a member’s financial health and capacity to repay are the primary determinants for extending credit.

Member credit assessment: Involves a process of risk identification, measurement and methodologies to generate credit scores complemented by risk-based credit reviews. Quantitative factors for depositories should address all Uniform Financial Institutions Rating System (UFIRS) components, including, among other things, capital position, asset quality, income performance, liquidity and financial trends. Qualitative factors should include management character, corporate structure complexity, business models with concentrations in high-risk products, and industry conditions.

Monitoring credit conditions: Emphasizes that ongoing monitoring is critical to track member performance and industry conditions and allows FHLBanks to adjust ratings, mitigate risk and make informed credit decisions. Among other things, FHLBanks should monitor market indicators (e.g., member equity price volatility), changes in the market environment, changes in borrowing behavior, asset growth and regulatory examination reports. FHLBanks should periodically reevaluate its processes to ensure they remain valid as conditions change.

Oversight of “troubled members”: Outlines that all FHLBanks must have escalation policies and procedures to address risks associated with “troubled members.” The guidance also emphasized the importance of (i) coordination with prudential regulators, Federal Reserve Banks, and deposit insurers, and (ii) establishing default and failure management policies.