US Federal Home Loan Banks Exposed to Europe’s Debt Crisis

From the Bloomberg/Businessweek

The U.S. Federal Home Loan Banks’ unsecured lending to foreign institutions skyrocketed last year as the European sovereign debt crisis intensified, raising concerns about their risk management, an auditor’s report said today.

The Federal Housing Finance Agency, which oversees the 12 regional Home Loan Banks, should tighten limits on such lending and improve monitoring of whether that lending exceeds the limits, the FHFA Office of Inspector General said in the report.

“FHFA’s current regulation continues to permit FHLBanks to build large unsecured credit portfolios that may produce unreasonable risk,” wrote Richard Parker, director of the auditor’s Office of Policy, Oversight and Review. “FHFA should, therefore, reassess the counterparty risk limits associated with its existing regulation.”

Several Home Loan Banks last year made short-term loans totaling about $3 billion to two European banks that had received government bailouts and were on a credit watch, according to the report.

Federal Home Loan Banks’ unsecured lending to foreign banks peaked in April of 2011 at $101 billion before falling to $41 billion at the end of the year, the audit found.

The US banking system has likely more exposure to the Eurozone than disclosed. This could be just one example.