FHFA Proposes New Capital Framework for Fannie Mae and Freddie Mac
FHFA and the Office of Federal Housing Enterprise Oversight (OFHEO) proposed a new regulatory capital framework for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)—collectively known as the Enterprises. The proposed rule would make certain conforming amendments to definitions in the FHFA regulations for assessments and minimum capital. It would also remove the OFHEO Regulation on capital for the Enterprises. Comments must be received on or before August 31, 2020.
This proposed rule is a re-proposal of the regulatory capital framework set forth in the notice of proposed rulemaking published in the Federal Register on July 17, 2018. The 2018 proposal, which remains the foundation of this proposed rule, contemplated risk-based capital requirements based on a granular assessment of credit risk specific to different mortgage loan categories as well as two alternatives for an updated leverage ratio requirement. The proposed rule contemplates a number of key enhancements to the 2018 proposal, including:
- Simplifications and refinements of the grids and risk multipliers for the credit risk capital requirements for single-family mortgage exposures, including removal of the single-family risk multipliers for loan balance and the number of borrowers
- A countercyclical adjustment to the credit risk capital requirements for single-family mortgage exposures
- A prudential floor on the credit risk capital requirement for mortgage exposures
- Refinements to the capital treatment of credit risk transfers structures, including a minimum capital requirement on senior tranches of credit risk transfers retained by an Enterprise and an adjustment to reflect that credit risk transfers does not have the same loss-absorbing capacity as equity capital
- The addition of a credit risk capital requirement for Enterprise cross-holdings of mortgage-backed securities
- Risk-based capital requirements for a number of other exposures not explicitly addressed by the 2018 proposal
- Supplemental capital requirements based on the Basel framework's definitions of total capital, tier 1 capital, and CET1 capital
- Capital buffers that would subject an Enterprise to increasing limits on capital distributions and discretionary bonus payments to the extent that its regulatory capital falls below the prescribed buffer amounts
- A stability capital buffer tailored to the risk that an Enterprise's default or other financial distress could have on the liquidity, efficiency, competitiveness, and resiliency of national housing finance markets
- A revised method for determining operational risk capital requirements, as well as a higher floor
- A requirement that each Enterprise maintain internal models for determining its own estimates of risk-based capital requirements
The regulatory capital framework contemplated by the proposed rule would require each Enterprise to maintain total capital of not less than 8.0% of risk-weighted assets, adjusted total capital of not less than 8.0% of risk-weighted assets, tier 1 capital of not less than 6.0% of risk-weighted assets, and common equity tier 1 (CET1) capital of not less than 4.5% of the risk-weighted assets. Each Enterprise would be also required to satisfy the following leverage ratios—core capital of not less than 2.5% of adjusted total assets and tier 1 capital of not less than 2.5% of the adjusted total assets.
Related Link: Federal Register Notice
Comment Due Date: August 31, 2020
Keywords: Americas, US, Banking, Regulatory Capital, CET 1, Basel, Credit Risk, Market Risk, Operational Risk, Leverage Ratio, Fannie Mae, Fannie Mac, FHFA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
HKMA Updates List of Service Providers Under OTC Derivatives RegimeRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.