Oversight Council asks Fannie and Freddie to Raise their Capital Cushion
The Financial Stability Oversight Council has conceded that increased financial strain on government-sponsored enterprises, ‘Freddie’ and ‘Fannie’, could hamper the cause of financial stability. The FSOC proposed that the organizations hold a much larger capital buffer.
The FSOC, a regulator created by the Dodd-Frank Act to preside over the financial system for any imminent risk, concluded the aforesaid after meticulously reviewing the secondary mortgage market. The FHFA, already in its post-conservatorship program for the two big Fs, had suggested that they keep a buffer five times higher than their current levels of capital. Also, they believed it to be prudent for Fannie Mae and Freddie Mac to bring their standards of capital in line with the banks.
If the FHFA can put a final stamp on the proposal by December, it may help ‘Fannie’ and ‘Freddie’ begin capital enhancement and detach itself from the conservatorship program in 2021. The central idea is to arrest financial strain if a 2008-like scenario of asset deterioration ever comes to pass again.
Howard Adler, deputy assistant secretary for the council, stated in a presentation that “Moreover, it is possible that additional capital could be required for the enterprises to remain viable concerns in the event of a severely adverse stress, particularly if the enterprises’ asset quality were ever to deteriorate to levels comparable to the experience leading up to 2008 financial crisis. For that reason, the statement encourages FHFA to consider the relative merits of alternative approaches for more dynamically calibrating the capital buffers.”
The capital cushion being talked about is risk-insensitive, given that it relies not on the risk-weighted assets but the total adjusted assets. At the moment, the council has not designated Fannie and Freddie as “systemically important financial institutions.” This said, if the regulatory body finds FHFA’s final capital framework program to be insufficient in easing the capital strain on the two Fs, the FSOC will designate them so, thereby ensuring bank-like overviewing for the two.