FR 2021-01267

The document in question is a notice from the Federal Housing Finance Agency (FHFA), an organization tasked with overseeing certain aspects of the housing finance sector in the United States. The document announces an adjustment in the cap on average total assets that determine whether a Federal Home Loan Bank member qualifies as a "community financial institution" (CFI). This adjustment raised the cap to $1,239,000,000 effective on January 1, 2021, based on a 1.2% increase in the Consumer Price Index for all urban consumers (CPI-U) between November 2019 and November 2020.

General Summary

This document details a regulatory change made by the FHFA to account for inflation by updating the asset cap for CFIs. CFIs are a type of financial institution distinguished by the size of their assets, and this adjustment helps ensure these rules remain relevant in changing economic conditions. The change is calculated using the CPI-U, a measure of inflation published by the Department of Labor.

Significant Issues and Concerns

One main issue with the document is the lack of clarity on which institutions are affected by this change. Without specific information, institutions might find it difficult to determine whether they still qualify as a CFI under the new cap. Another concern is the methodology behind using the CPI-U as the basis for this adjustment. The document does not provide an explanation for choosing this particular economic indicator over others, which might lead to questions about its appropriateness.

Additionally, the explanation of the calculation process could be complex for those unfamiliar with economic adjustments. The distinction between using unadjusted versus seasonally adjusted data adds an extra layer of complexity, potentially leading to confusion.

Impact on the Public

For the general public, this regulatory adjustment could appear technical and remote from everyday concerns. However, it indirectly affects them by influencing how small community financial institutions operate. These institutions are often critical in providing financial services in local communities, possibly affecting loan availability and interest rates.

Impact on Stakeholders

For Federal Home Loan Bank members, particularly those on the cusp of the previous asset limit, this change could have significant implications. It might allow more institutions to qualify as CFIs, thereby granting them access to benefits that come with that designation, such as the ability to receive long-term advances.

Smaller institutions might face more competition as more banks classify as CFIs due to this cap change. On the other hand, this could potentially foster a more vibrant competitive environment among small to medium-sized financial institutions, benefiting consumers in the long term.

The document does not address how this change impacts financial stability or functionality differently for small versus large institutions, an area that could be of critical concern to stakeholders trying to navigate the economic landscape post-adjustment.

Overall, while the adjustment aims to keep up with inflation, the document could benefit from a more comprehensive explanation of the impacts and justifications for the methodologies used. This would enhance understanding and acceptance among both financial institutions and the broader public.

The document from the Federal Housing Finance Agency (FHFA) announces an adjustment to the cap on average total assets that defines a "community financial institution" (CFI). This adjustment is significant because it directly influences which institutions can qualify for certain benefits provided to CFIs under the Federal Home Loan Bank regulations.

Financial References and Adjustments

The core financial reference in this document is the adjustment of the cap on average total assets used to define CFIs. As of January 1, 2021, this cap is adjusted to $1,239,000,000. This reflects a 1.2 percent increase in the Consumer Price Index for all urban consumers (CPI-U) from November 2019 to November 2020. This cap is an increase from the previous year’s cap of $1,224,000,000, which represented a 2.1 percent increase over the prior year.

These financial adjustments stem from a statutory requirement that the cap be annually adjusted according to the percentage increase in the CPI-U. The rationale is to ensure that the threshold for being classified as a CFI remains equitable over time, taking into account inflation and other economic changes.

Issues Related to Financial Adjustments

One identified issue is the complexity surrounding the adjustment methodology. The document notes that the FHFA uses unadjusted CPI-U data to calculate the cap, which might be confusing for those unfamiliar with economic indices and the distinction between adjusted and unadjusted data. In layman's terms, this means that the data used has not been modified to account for predictable seasonal variations in pricing. Instead, raw data is used, which the Department of Labor recommends for consistency and to avoid later revisions.

Another point of concern is the exclusive reliance on the CPI-U for adjusting the cap. While the CPI-U is a recognized measure of inflation affecting urban consumers, the document does not address why this measure is preferred over other economic indicators. This raises questions about the adequacy of the CPI-U as the sole basis for such financial adjustments.

Furthermore, while the document specifies the new financial threshold, it does not detail how this might impact Federal Home Loan Banks and their members operationally or financially. This absence of discussion leaves room for speculation about how changes in cap amounts might influence the financial stability or performance of smaller financial institutions as opposed to larger ones.

Implications and Considerations

Thus, while the document updates the financial thresholds defining CFIs, it sparks broader questions about the methodology and impact of these changes. For a better understanding, stakeholders might benefit from a detailed breakdown of why the CPI-U is utilized and an analysis of how these financial adjustments might affect different sizes of institutions. Such clarification would aid in comprehending the operational implications of these annual adjustments and their influence on the financial landscape of CFIs.