WASHINGTON — The Federal Home Loan banks are opposing a report released Thursday that said transparent and consistent accounting cannot be achieved as long as the system is scattered throughout 12 districts nationwide.

"The current combined financial reporting and decentralized structure of the FHLBank System and the Office of Finance is not conducive to achieving the desired goal of providing the highest-quality financial disclosure," according to the report. "Achieving the desired level of transparency, consistency, comparability and comprehensiveness in system-level disclosure would require some form of centralized management and control over the FHLBank System."

The report was commissioned last year by the system's Office of Finance, which issues the system's debt, and authored by Williams & Connolly LLP. Though the system asked for the report, its leaders made clear that they disagreed with its central point.

"We strongly believe that we can achieve the quite appropriate goals of transparency and consistency in a combined financial structure within the decentralized structure of the 12 Home Loan banks," John Fisk, the chief executive of the Office of Finance, said in an interview.

John von Seggern, the president of the Council of Federal Home Loan Banks, said it is up to the members to decide whether the system should be more centralized. "This is a cooperative structure, so consolidation would be and should be an issue that is directed by the membership."

The report was issued as accounting issues have preoccupied the Home Loan banks over the past year. The system has struggled under the weight of steep other-than-temporary impairment charges on private-label mortgage-backed securities but won a reprieve earlier this year when the Financial Accounting Standards Board ruled that only the credit-related portion of such charges would be counted against net income.

The change sent 10 of the 12 Home Loan banks into the black during the second quarter, giving the system earnings surpassing $1.1 billion. (Not every bank is doing well, however. The Seattle Home Loan Bank was informed this week by the Federal Housing Finance Agency that it would formally be classified as undercapitalized.)

As it is, the Office of Finance publishes a combined financial report each quarter that considers the results of each Home Loan bank in one statement. But the study said the combined report was insufficient and often pointed readers back to individual quarterly reports filed with the Securities and Exchange Commission.

"These issues — particularly the absence of underlying consistency — dilute users' confidence" in the system's statements, the report said.

The Office of Finance has worked with the Home Loan banks to begin some efforts to standardize treatments of some holdings, including the private-label MBS that has caused the OTTI charges. Fisk said that process would continue and look into other aspects of financial reporting and disclosure in the system.

The Federal Housing Finance Agency, which regulates the Home Loan banks and Office of Finance, said it was addressing the system's shortcomings. "FHFA has proposed a rule that will expand the OF board, create an independent audit committee and facilitate greater consistency in the accounting policies and procedures that the banks use when providing input to the OF for the combined reports," the agency said.

But Bert Ely, an independent consultant in Alexandria, Va., said the issue is not accounting but whether the number of Home Loan banks should be cut down.

"This is the first step toward consolidating the banks," he said. "If you start centralizing some functions, why not centralize everything? It undercuts the autonomy of each of the banks."

The study's authors acknowledged how touchy the system and its members are about the prospect of consolidation but said it would be the "best way to create the necessary authority, accountability and consistency among the individual FHLBanks."

"Consolidation necessarily would drive uniformity of systems and accounting policies," the report said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.