FHFA Orders on Stress Test Reporting; Issues Rule on Capital Framework
The Federal Housing Finance Agency (FHFA) issued Orders, dated March 10, 2022, with respect to stress test reporting as of December 31, 2021. Summary instructions and guidance accompanied the Orders to provide testing scenarios. Additionally, FHFA adopted a final rule that amends the enterprise regulatory capital framework by refining the prescribed leverage buffer amount and credit risk transfer securitization framework for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)—collectively known as the Enterprises. This rule is effective from May 16, 2022.
FHFA had proposed amendments to the enterprise regulatory capital framework for Fannie Mae and Freddie Mac on September 27, 2021. After considering the comments on the proposed rule, FHFA is adopting, substantially as proposed, amendments to the leverage buffer and risk-based capital treatment of credit risk transfer exposures. FHFA believe that the amendments in this final rule will lessen the potential deterrents to Enterprise risk transfer by properly aligning incentives in the enterprise regulatory capital framework and will position the Enterprises to operate in a safe and sound manner to fulfill their statutory mission throughout the economic cycle. Specifically, the final rule will:
- Replace the fixed leverage buffer equal to 1.5% of an Enterprise's adjusted total assets with a dynamic leverage buffer equal to 50% of the Enterprise's stability capital buffer
- Replace the prudential floor of 10% on the risk weight assigned to any retained credit risk transfer exposure with a prudential floor of 5% on the risk weight assigned to any retained credit risk transfer exposure
- Remove the requirement that an Enterprise must apply an overall effectiveness adjustment to its retained credit risk transfer exposures
In addition, the final rule will implement technical corrections to various provisions of the enterprise regulatory capital framework that was published on December 17, 2020, highlighted by a significant typographical error in the definition of the long-term House Price Index, or HPI, trend that constitutes the basis for calculating the single-family countercyclical adjustment. Coming back to the Orders on stress test reporting, each regulated entity shall report to FHFA and to the Board of Governors of the Federal Reserve System the results of the stress testing as required by 12 CFR 1238 on stress testing of regulated entities, in the form and with the content described therein and in the summary instructions and guidance, with Appendices 1 through 7 thereto, accompanying the Orders. FHFA is responsible for ensuring that the regulated entities operate in a safe and sound manner, including the maintenance of adequate capital and internal controls, that their operations and activities foster liquid, efficient, competitive, and resilient national housing finance markets, and that they carry out their public policy missions through authorized activities. The Orders became applicable on March 10, 2022.
Keywords: Americas, US, Banking, Stress Testing, Dodd Frank Act, Reporting, Regulatory Capital, Credit Risk, Fannie Mae, Freddie Mac, Capital Buffer, Securitization Framework, FED, FHFA
Advises U.S. and Canadian financial institutions on risk and finance integration, CCAR/DFAST stress testing, IFRS9 and CECL credit loss reserving, and credit risk practices.
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