Acknowledging Systemic Risk, FSOC Endorses Plan to Raise Fannie, Freddie Capital

While not going so far as to designate the GSEs as systemically important financial institutions, the Financial Stability Oversight Council today unanimously endorsed the Federal Housing Finance Agency’s plan to rebuild Fannie Mae’s and Freddie Mac’s capital levels. FHFA Director Mark Calabria called FSOC’s action “historic.”

Based on its recent review of the secondary market, FSOC warned that the companies’ current capital levels pose risks to financial stability if not properly mitigated. To do that, FSOC urged FHFA to implement capital definitions similar those for U.S. banking organizations, avoid market distortions that could result from lower credit risk requirements for the GSEs and consider the merits of alternative approaches to calibrate capital.

The American Bankers Association remains generally supportive of FHFA’s efforts to move the process for ending Fannie’s and Freddie’s conservatorships forward, including establishing rigorous and achievable capital standards for the GSEs. While noting that FHFA’s re-proposed regulatory capital framework addresses concerns raised by ABA about the original proposal, the association in August said that the re-proposal “raises concerns of its own, particularly with regard to the implications for the primary market and our members’ continued ability to sell loans to the GSEs in the revised GSE marketplace implied by the re-proposal.”