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March 22, 2012

FHLBank Atlanta. GIOA Conference. Counterparty Credit. March 22, 2012. Agenda. Overview of FHLBank System FHLBank Atlanta Shareholders Credit Analysis Risk Rating Models Unsecured Credit Analysis Derivative Exposure Fed Funds Exposure Ongoing Analysis and Monitoring.

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March 22, 2012

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  1. FHLBank Atlanta GIOA Conference Counterparty Credit March 22, 2012

  2. Agenda Overview of FHLBank System FHLBank Atlanta Shareholders Credit Analysis Risk Rating Models Unsecured Credit Analysis Derivative Exposure Fed Funds Exposure Ongoing Analysis and Monitoring

  3. System Overview The Federal Home Loan Banks are cooperatives created by Congress in 1932 Twelve regional Banks with nearly $770 billion in total assets Provide wholesale funding for more than 7,700 financial institutions (shareholders) Offers competitively priced financing, community development grants, and other banking services Regulator: Federal Housing Finance Agency Debt issuer for System: Office of Finance

  4. FHLBank System Seattle Boston NewYork Chicago Pittsburgh Des Moines Indianapolis San Francisco Cincinnati Topeka Atlanta Dallas US Territories: Puerto Rico, Virgin Islands, Guam

  5. FHLBank Structure • Each FHLBank is a cooperative • Shareholders purchase capital stock as part of membership • Shareholders purchase stock to capitalize their borrowing • Shareholders may receive dividends on their capital investments • FHLBanks obtain funding by selling bonds • Each FHLBank is jointly and severally liable for the FHLBanks’ consolidated obligations

  6. FHLBank Atlanta Shareholders as of September 30, 2011 1 CDFI 152 Credit Unions 15 Insurance Companies 42 Thrifts 97 Savings Banks 766 Commercial Banks 1,073 Total Members

  7. Shareholder Credit Analysis Utilize Credit Risk Rating Models Bank model Thrift model Credit Union model Insurance Company model Models developed in-house with use of external experts Run models every quarter Team of credit analysts prepare detailed credit write-ups each quarter Largest shareholders Lower credit quality shareholders Credit Analysts adjust model scores for approximately 15% of the shareholders

  8. Credit Risk Rating Model Model assigns a rating from 1 through 10 (with 1 being the healthiest rating) Based upon increasing probability of default Four key factors Slow Loans: 30+ and non-accruals / total assets Core Capital: core capital / average total assets ROA: 2 quarters net income / total assets Liquidity: government & agencies / total assets The four key factors account for 85% of the predictive power of the model

  9. Impact of Credit Score 10 • Assigned a higher confidence level that results in more conservative discounts and collateral values • May be required to physically deliver loan collateral and collateralize prepayment fees • Credit availability may be reduced and borrowing terms may be restricted • 160 Shareholders have failed since August 2008 • All were rated a credit score 10 before failure • On average, shareholders identified as a 10 credit score twenty months before failure

  10. Credit Score Overview

  11. Unsecured Credit Analysis Unsecured Credit Positions Exposure related to derivative activities Exposure related to Fed Funds positions Unsecured Credit Monitoring and Reporting Overview of daily, weekly, monthly, quarterly and annual processes

  12. The Bank swaps the majority of its debt and advances (loans to shareholders) to LIBOR The Bank purchases interest rate caps and floors to manage interest rate risk exposure Collateral agreements are required on all derivatives and collateral delivery thresholds are established $140 billion notional as of 3Q 2011 $13 million of unsecured exposure Derivative Activity 12

  13. The Bank utilizes Fed Funds for liquidity holdings and investment of shareholder overnight accounts Fed Funds limited to “A” rated or higher counterparts A counterparty with long-term NRSRO rating on Negative Watch is automatically downgraded one notch Exposure to counterparties is limited to a percentage of capital Exposure averages $16 billion Fed Funds Activity 13

  14. Formal annual reviews of unsecured counterparties are required per regulation and the bank’s Risk Management Policy Full list of 52 approved counterparties was reviewed and approved by the Bank’s Credit and Collateral Committee in January 2012 These annual reviews are supplemented with daily, bi-weekly, and quarterly monitoring and reporting Unsecured Credit Monitoring 14

  15. Management monitors the financial condition of the counterparties very aggressively; daily activities include the following: Monitoring of news, events and market indicators, most of which are tracked through an automated risk dashboard; Bloomberg information is fed directly into the dashboard NRSRO ratings are loaded automatically into an unsecured credit tracking system twice a day and risk levels are adjusted downward on a real-time basis Unsecured Credit Monitoring 15

  16. Bi-weekly activities include the following: Equity and Debt Triggers – Counterparties are reviewed to determine if their stock and debt prices decreased more than associated indices; triggers are set as follows: (5%) over the preceding week (10%) over the preceding month (20%) over the preceding quarter A detailed analysis occurs when a trigger is exceeded; experience has shown this to be a leading indicator of an upcoming credit downgrade and management has used the results of the analysis to proactively downgrade counterparties; a recent example is shown on the next slide Unsecured Credit Monitoring 16

  17. Example of an equity trigger report: On November 21, 2011, KBC Bank – KBC Group exceeded various equity triggers: Based upon the volatility observed, management elected to block KBC’s overnight line; the term line had previously been blocked On December 21, 2011, KBC, along with its sovereign, Belgium, was placed on Negative Watch by Fitch; management effectively blocked the counterparty one month before the ratings agency took action Unsecured Credit Monitoring 17

  18. Monthly activities include the following: Reporting to Credit and Collateral Committee of all exposures and any upgrades and downgrades Meetings are held with Liquidity Management to discuss on-going strategies to dilute geographic concentrations and to discuss the approval of counterparties in countries that are under invested DV01 Limit exists and is regularly monitored; report is generated in the Treasury Area and both the Treasurer and CFO review the report and attest to its compliance on a monthly basis Unsecured Credit Monitoring 18

  19. Quarterlyactivities include the following: Detailed reviews of quarterly earnings and regulatory filings Monitoring of changes in Tier 1 capital in excess of 10% to ensure the appropriate limits are in place as well as to monitor interim financial performance Unsecured Credit Monitoring 19

  20. There is no substitute for ongoing active analysis Use of “triggers” helps mitigate risk Can focus on a few key metrics to monitor counterparty strength Slow Loans, Core Capital, ROA, Liquidity Process can be time consuming and costly Summary 20

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