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Advisory Bulletin

Classification of Investment Securities at FHLBanks

Number: AB 2016-01
Pertains To: FHL Banks


AB 2016-01




​This advisory bulletin provides Federal Housing Finance Agency (FHFA) guidance on the classification of investment securities at the Federal Home Loan Banks (FHLBanks). It incorporates the guidance provided by the Uniform Agreement on the Classification and Appraisal of Securities Held by Depository Institutions (Uniform Agreement​) issued by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (collectively, the Federal Banking Agencies). 


In 2010, FHFA’s Division of Federal Home Loan Bank Regulation (DBR) adopted as part of its examination program the Federal Banking Agencies’ then-current 2004 Uniform Agreement, with additional related guidelines on how to apply it to the classification of private-label mortgage-backed securities (PLMBS). While DBR adopted the 2004 Uniform Agreement and related guidelines through a bulletin directed to its examination staff, the staff in turn communicated the classification approach to the FHLBanks through ongoing examination communications. In addition, FHFA published DBR’s general framework for classifying investment securities in FHFA’s examination module on Investment Portfolio Management.

The Federal Banking Agencies revised the Uniform Agreement in October 2013. The 2013 Uniform Agreement replaced references to ratings by the Nationally Recognized Statistical Rating Agencies (NRSROs) with alternative standards of creditworthiness. Similarly, in November 2013, FHFA adopted a standard for investment quality through revisions to Part 1276 – Federal Home Loan Bank Investments, to remove references to NRSROs in that rule. Both the Federal Banking Agencies’ changes to the Uniform Agreement and FHFA’s changes to Part 1276 responded to section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). In keeping with the Dodd-Frank Act and FHFA’s attendant​ obligation to remove references to or requirements based on NRSRO ratings, FHFA is adopting through this advisory bulletin the 2013 Uniform Agreement for FHLBank supervisory purposes.


The classification of assets is one process through which a FHLBank, as well as FHFA, identifies and communicates the level of credit risk on a FHLBank’s balance sheet. The FHLBanks should follow the 2013 Uniform Agreement when classifying investment securities. [1] The 2013 Uniform Agreement is attached for reference. Where FHFA’s rules and guidance and the 2013 Uniform Agreement may conflict, FHFA’s rules and guidance apply.

In applying the 2013 Uniform Agreement, a FHLBank should use sound and conservative assumptions, particularly when following the guidance in the Uniform Agreement as it pertains to upgrades. For example, when considering whether to upgrade a classified security to “pass,” a FHLBank should base its assessment on assumptions that minimize the likelihood that the FHLBank would need to classify the security again in the future. As a general rule, FHFA expects FHLBanks not to use assessment approaches that would allow them to move a security in and out of adverse classification on a recurring basis. Therefore, a FHLBank should only upgrade a security after evaluating its future performance under economic and other scenarios that are significantly adverse and incorporating in the FHLBank’s upgrade criteria sufficient margins for error.

Notably, the 2013 Uniform Agreement provides classification approach examples that, when taken together, provide boundaries for upgrading classified securities. Among other factors, the examples indicate that, regardless of whether a FHLBank has actually incurred credit losses, an analysis supporting the upgrade of a security previously classified Substandard must show that the FHLBank will receive all future contractual payments. They further indicate that a FHLBank may only upgrade such a security after a sustained period of performance. For a security that a FHLBank had classified Substandard and on which it had incurred actual credit losses, an analysis would have to clearly show no future risk of loss to support an upgrade. 

Examinations of the FHLBanks will evaluate how a FHLBank applies the 2013 Uniform Agreement and the guidance in this advisory bulletin to its classification practices. When FHFA examiners classify a FHLBank’s investment securities, they will also follow the 2013 Uniform Agreement and the guidance in this advisory bulletin.


[1] For purposes of applying the guidance in this Advisory Bulletin, “investment securities” generally means those investments categorized as securities according to FHFA call report instructions for FHLBank reporting. For example, the guidance does not apply to federal funds sold, certificates of deposit, or securities purchased under resale agreements (i.e., reverse repurchase agreements).

Advisory Bulletins communicate guidance to FHFA supervision staff and the regulated entities on specific supervisory matters pertaining to the FHLBanks, Fannie Mae, and Freddie Mac.  For the FHLBanks, contact Amy Bogdon, Associate Director for Regulatory Policy and Programs, DIvision of FHLBank Regulation, at Amy.Bogdon@fhfa.gov.  For this advisory bulletin specifically, contact Louis Scalza, Associate Director, Office of Examinations, Division of FHLBank Regulation, at Louis.Scalza@fhfa.gov  

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