FHFA Proposes New Capital Framework for Fannie Mae and Freddie Mac

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