Enterprise Regulatory Capital Framework

Federal RegisterJun 30, 2020

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FEDERAL HOUSING FINANCE AGENCY

12 CFR Parts 1206, 1225, and 1240

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR Part 1750

RIN 2590-AA95

Enterprise Regulatory Capital Framework

AGENCY:

Federal Housing Finance Agency; Office of Federal Housing Enterprise Oversight.

ACTION:

Notice of proposed rulemaking; request for comments.

SUMMARY:

The Federal Housing Finance Agency (FHFA or the Agency) is seeking comments on a new regulatory capital framework for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac, and with Fannie Mae, each an Enterprise). The proposed rule would also make conforming amendments to definitions in FHFA's regulations for assessments and minimum capital and would also remove the Office of Federal Housing Enterprise Oversight's (OFHEO) regulation on capital for the Enterprises.

DATES:

Comments must be received on or before August 31, 2020.

ADDRESSES:

You may submit your comments on the proposed rule, identified by regulatory information number (RIN) 2590-AA95, by any one of the following methods:

•

Agency Website: www.fhfa.gov/open-for-comment-or-input.

•

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments. If you submit your comment to the Federal eRulemaking Portal, please also send it by email to FHFA at

RegComments@fhfa.gov

to ensure timely receipt by FHFA. Include the following information in the subject line of your submission: Comments/RIN 2590-AA95.

•

Hand Delivered/Courier:

The hand delivery address is: Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA95, Federal Housing Finance Agency, Eighth Floor, 400 Seventh Street SW, Washington, DC 20219. Deliver the package at the Seventh Street entrance Guard Desk, First Floor, on business days between 9 a.m. and 5 p.m.

•

U.S. Mail, United Parcel Service, Federal Express, or Other Mail Service:

The mailing address for comments is: Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA95, Federal Housing Finance Agency, Eighth Floor, 400 Seventh Street SW, Washington, DC 20219. Please note that all mail sent to FHFA via U.S. Mail is routed through a national irradiation facility, a process that may delay delivery by approximately two weeks. For any time-sensitive correspondence, please plan accordingly.

FOR FURTHER INFORMATION CONTACT:

Naa Awaa Tagoe, Senior Associate Director, Office of Financial Analysis, Modeling & Simulations, (202) 649-3140,

NaaAwaa.Tagoe@fhfa.gov;

Andrew Varrieur, Associate Director, Office of Financial Analysis, Modeling & Simulations, (202) 649-3141,

Andrew.Varrieur@fhfa.gov;

or Miriam Smolen, Associate General Counsel, Office of General Counsel, (202) 649-3182,

Miriam.Smolen@fhfa.gov.

These are not toll-free numbers. The telephone number for the Telecommunications Device for the Deaf is (800) 877-8339.

SUPPLEMENTARY INFORMATION:

Comments

FHFA invites comments on all aspects of the proposed rule and will take all comments into consideration before issuing a final rule. Copies of all comments will be posted without change, and will include any personal information you provide such as your name, address, email address, and telephone number, on the FHFA website at

http://www.fhfa.gov.

In addition, copies of all comments received will be available for examination by the public through the electronic rulemaking docket for this proposed rule also located on the FHFA website.

Table of Contents

I. Introduction

II. Overview of the Proposed Rule

A. Regulatory Capital Requirements

B. Capital Buffers

C. Key Enhancements

D. Sizing of Regulatory Capital Expectations

1. Aggregate Regulatory Capital

2. 2018 Proposal's Capital Requirements

3. 2008 Financial Crisis Loss Experience

III. Background

A. Pre-Crisis Regulatory Capital Framework

B. Lessons of the 2008 Financial Crisis

1. Capital Adequacy

2. Going-Concern Standard

3. High-Quality Capital

4. Stability of the National Housing Finance Markets

C. Post-Crisis Changes to Regulatory Capital Frameworks

IV. Rationale for Re-Proposal

A. Responsibly Ending the Conservatorships

B. Ensuring Capital Adequacy

1. Quality of Capital

2. Quantity of Capital

C. Addressing Pro-Cyclicality

V. Definitions of Regulatory Capital

A. Statutory Definitions

B. Supplemental Definitions

1. Loss-Absorbing Capacity

2. Components of Regulatory Capital

3. Regulatory Adjustments and Deductions

VI. Capital Requirements

A. Risk-Based Capital Requirements

1. Supplemental Requirements

2. Risk-Weighted Assets

B. Leverage Ratio Requirements

1. Adjusted Total Assets

2. Tier 1 Leverage Ratio Requirement

3. Sizing of the Requirements

C. Enforcement

VII. Capital Buffers

A. Prescribed Capital Conservation Buffer Amount (PCCBA)

1. Stress Capital Buffer

2. Countercyclical Capital Buffer

3. Stability Capital Buffer

B. Leverage Buffer

C. Payout Restrictions

VIII. Credit Risk Capital: Standardized Approach

A. Single-Family Mortgage Exposures

1. Single-Family Business Models

2. Calibration Framework

3. Base Risk Weights

4. Countercyclical Adjustment

5. Risk Multipliers

6. Credit Enhancement Multipliers

7. Minimum Adjusted Risk Weight

B. Multifamily Mortgage Exposures

1. Multifamily Business Models

2. Calibration Framework

3. Base Risk Weights

4. Countercyclical Adjustment

5. Risk Multipliers

6. Minimum Adjusted Risk Weight

C. CRT and Other Securitization Exposures

1. Background

2. PLS and Other Non-CRT Securitization Exposures

3. Retained CRT Exposures

D. Other Exposures

1. Commitments and Other Off-Balance Sheet Exposures

2. Exposures to Sovereigns

3. Crossholdings of Enterprise MBS

4. Corporate Exposures

5. OTC Derivative Contracts

6. Cleared Transactions

7. Credit Risk Mitigation

IX. Credit Risk Capital: Advanced Approach

X. Market Risk Capital

A. Standardized Approach

1. Single Point Approach

2. Spread Duration Approach

3. Internal Models Approach

B. Advanced Approach

C. Market Risk Management

XI. Operational Risk Capital

XII. Impact of the Enterprise Capital Rule

A. Enterprise-Wide

B. Single-Family Business

C. Multifamily Business

D. Other Assets

XIII. Comparisons to the U.S. Banking Framework

XIV. Compliance Period

XV. Temporary Increases of Minimum Capital Requirements and Other Conforming Amendments

XVI. Paperwork Reduction Act

XVII. Regulatory Flexibility Act

XVIII. Proposed Rule

I. Introduction

FHFA is seeking comments on a new regulatory capital framework for the Enterprises. This notice of proposed rulemaking (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 (2018 proposal).

The 2018 proposal, which remains the foundation of the 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. With this re-proposal, FHFA is proposing enhancements to establish a post-conservatorship regulatory capital framework that ensures that each Enterprise operates in a safe and sound manner and is positioned to fulfill its statutory mission to provide stability and ongoing assistance to the secondary mortgage market across the economic cycle, in particular during periods of financial stress.

FHFA Enterprise Capital Requirements,

83 FR 33312 (Jul. 17, 2018).

Other enhancements to the Enterprises' supervisory and regulatory framework might also be necessary, for example with respect to the Enterprises' liquidity risk management.

Pursuant to the Federal Housing Enterprises Financial Safety and Soundness Act of 1992

(Safety and Soundness Act), as amended by the Housing and Economic Recovery Act of 2008

(HERA), the FHFA Director's principal duties include, among other duties, ensuring that each Enterprise operates in a safe and sound manner, that the operations and activities of each Enterprise foster liquid, efficient, competitive, and resilient national housing finance markets, and that each Enterprise carries out its statutory mission only through activities that are authorized under and consistent with the Safety and Soundness Act and its charter.

Pursuant to their charters, the statutory purposes of the Enterprises are, among other purposes, to provide stability in, and ongoing assistance to, the secondary market for residential mortgages.

Consistent with these statutory duties and purposes, FHFA's enhancements contemplated by the proposed rule are intended to achieve three primary objectives:

Public Law 102-550, 106 Stat. 3941 (1992).

Public Law 110-289, 122 Stat. 2654 (2008).

12 U.S.C. 4513(a)(1).

Id.

sections 1451 note, 1716.

• Preserve the mortgage risk-sensitive framework of the 2018 proposal, with simplifications and refinements;

• Increase the quantity and quality of the regulatory capital of the Enterprises to ensure that, during and after conservatorship, each Enterprise operates in a safe and sound manner and is positioned to fulfill its statutory mission to provide stability and ongoing assistance to the secondary mortgage market across the economic cycle; and

• Address the pro-cyclicality of the risk-based capital requirements of the 2018 proposal, also in furtherance of the safety and soundness of the Enterprises and their countercyclical mission.

FHFA believes it is important to re-propose the regulatory capital framework to afford interested parties an opportunity to comment on the enhancements contemplated by the proposed rule in its entirety in light of FHFA's intent to responsibly end the conservatorships of the Enterprises. This policy change is a departure from FHFA's stated policy at the time of the 2018 proposal, when the prospects for indefinite conservatorships might have informed the expectations of interested parties, their decision to comment, and the nature of comments submitted. Despite this, the comments received on the 2018 proposal were valuable and important. FHFA emphasizes that the purpose of the proposed rule is to establish a regulatory capital framework that ensures the safety and soundness of each Enterprise and its ability to fulfill its statutory mission across the economic cycle.

II. Overview of the Proposed Rule

A. Regulatory Capital Requirements

In response to the comments and feedback on the 2018 proposal and in furtherance of FHFA's stated objectives, the regulatory capital framework contemplated by the proposed rule would require each Enterprise to maintain the following risk-based capital:

• Total capital not less than 8.0 percent of risk-weighted assets, determined as described below;

• Adjusted total capital not less than 8.0 percent of risk-weighted assets;

• Tier 1 capital not less than 6.0 percent of risk-weighted assets; and

• Common equity tier 1 (CET1) capital not less than 4.5 percent of risk-weighted assets.

Each Enterprise also would be required to satisfy the following leverage ratios:

• Core capital not less than 2.5 percent of adjusted total assets; and

• Tier 1 capital not less than 2.5 percent of adjusted total assets.

Adjusted total assets would be defined as total assets under generally accepted accounting principles (GAAP), with adjustments to include certain off-balance sheet exposures. Total capital and core capital would have the meaning given in the Safety and Soundness Act. Adjusted total capital, tier 1 capital, and CET1 capital would be defined based on the definitions of total capital, tier 1 capital, and CET1 capital set forth in the regulatory capital framework (the Basel framework) developed by the Basel Committee on Bank Supervision (BCBS) that is the basis for the United States banking regulators' regulatory capital framework (U.S. banking framework). These supplemental regulatory capital definitions would fill certain gaps in the statutory definitions of core capital and total capital by making customary deductions and other adjustments for certain deferred tax assets (DTAs), goodwill, intangibles, and other assets that tend to have less loss-absorbing capacity during a financial stress.

To calculate its risk-based capital requirements, an Enterprise would determine its risk-weighted assets under two approaches—a standardized approach and an advanced approach—with the greater of the two used to determine its risk-based capital requirements. Under both approaches, an Enterprise's risk-weighted assets would equal the sum of its credit risk-weighted assets, market risk-weighted assets, and operational risk-weighted assets.

Under the standardized approach, the credit risk-weighted assets for mortgage loans secured by 1-4 unit residences (single-family mortgage exposures) and mortgage loans secured by five or more unit residences (multifamily mortgage exposures) would be determined using lookup grids and multipliers that assign an exposure-specific risk weight based on the risk characteristics of the mortgage exposure. The underlying exposure-specific credit risk capital requirements generally would be similar to those in the grids and multipliers of the 2018 proposal, subject to some simplifications and refinements discussed in Sections VIII.A and VIII.B.

This base risk weight would be equal to the unadjusted credit risk capital requirement for the mortgage exposure expressed in basis points and divided by 800, which is the 8.0 percent adjusted total capital requirement also expressed in basis points. For example, the credit risk capital requirement for a mortgage exposure with a base

risk weight of 50 percent would be 400 basis points (800 multiplied by 50 percent).

Like the 2018 proposal, the base risk weight would be a function of the mortgage exposure's loan-to-value (LTV) ratio with the property value generally marked to market (MTMLTV). For single-family mortgage exposures, the MTMLTV would be subject to a countercyclical adjustment to the extent that national house prices are 5.0 percent greater or less than an inflation-adjusted long-term trend. For both single-family and multifamily mortgage exposures, this base risk weight would then be adjusted to reflect additional risk attributes of the mortgage exposure and any loan-level credit enhancement, with the associated risk multipliers also generally similar to those of the 2018 proposal. To ensure an appropriate level of capital, this adjusted risk weight would be subject to a minimum floor of 15 percent.

As of September 30, 2019, under the proposed rule's standardized approach, the Enterprises' average risk weight for single-family mortgage exposures would have been 26 percent, and the Enterprises' average risk weight for multifamily mortgage exposures would have been 51 percent.

The average risk weights for single-family and multifamily mortgage exposures originated and acquired by an Enterprise in the previous six months would have been approximately 36 percent and 67 percent, respectively.

These average risk weights are determined based on the credit risk capital requirement for single-family and multifamily mortgage exposures after adjustments for mortgage insurance and other loan-level credit enhancement but before any adjustment for credit risk transfers.

While not shown, new originations are a subset of the mortgage exposures included in Tables 26 and 29.

While the standardized approach would utilize FHFA-prescribed lookup grids and risk multipliers, the advanced approach for credit risk-weighted assets would rely on each Enterprise's internal models. The advanced approach requirements would require each Enterprise to maintain its own processes for identifying and assessing credit risk, market risk, and operational risk. These requirements should ensure that each Enterprise continues to enhance its risk management system and also that neither Enterprise simply relies on the standardized approach's lookup grids and multipliers to define credit risk tolerances, measure its credit risk, or allocate capital. In the course of FHFA's supervision of each Enterprise's internal models for credit risk, FHFA also could identify opportunities to update or otherwise enhance the standardized approach's lookup grids and multipliers in a future rulemaking.

Under both the standardized and advanced approaches, an Enterprise would determine the capital treatment for eligible credit risk transfers (CRT) under a securitization framework by assigning risk weights to retained CRT exposures. Under the standardized approach, tranche-specific risk weights would be subject to a 10 percent floor. The proposed rule seeks comment on two approaches to determining the risk-weighted assets for retained CRT exposures, one of which contemplates adjustments to the exposure amounts of the retained CRT exposures to reflect counterparty risk, loss timing risk, and a general adjustment for the differences between CRT and regulatory capital, and the other of which is based on the U.S. banking framework.

Each Enterprise also would determine a market risk capital requirement for spread risk. Market risks other than spread risk would not be assigned a market risk capital requirement, but FHFA is seeking comment on more comprehensive approaches. Under the standardized approach, an Enterprise would determine its market risk-weighted assets using FHFA-specified formulas for some covered positions and its own models for other covered positions. An Enterprise would separately determine its market risk-weighted assets under an advanced approach that relies only on its own internal models for all covered positions.

The proposed rule also would require each Enterprise to determine its operational risk capital requirement utilizing the U.S. banking framework's advanced measurement approach, subject to a floor equal to 15 basis points of the Enterprise's adjusted total assets.

Each of these risk-based and leverage ratio requirements would be enforceable by FHFA under its general authority to order an Enterprise to cease and desist from a violation of law, which would include the proposed rule and its regulatory capital requirements. Pursuant to that authority, FHFA may require an Enterprise to develop and implement a capital restoration plan or take other appropriate corrective action. FHFA also could elect to enforce the risk-based and leverage ratio requirements pursuant to its authority to require an Enterprise to develop a plan to achieve compliance with prescribed prudential management and operational standards, and FHFA also could enforce the core capital leverage ratio requirement or the risk-based total capital requirement pursuant to its separate authority to require prompt corrective action if an Enterprise fails to maintain certain prescribed regulatory levels.

B. Capital Buffers

To avoid limits on capital distributions and discretionary bonus payments, an Enterprise would have to maintain regulatory capital that exceeds each of its adjusted total capital, tier 1 capital, and CET1 capital requirements by at least the amount of its prescribed capital conservation buffer amount (PCCBA). That PCCBA would consist of three separate component buffers—a stress capital buffer, a countercyclical capital buffer, and a stability capital buffer.

• The stress capital buffer would be 0.75 percent of the Enterprise's adjusted total assets, with this buffer in effect replacing the 2018 proposal's going-concern buffer. The 2018 proposal's going-concern buffer was a part of the Enterprise's total capital requirement, such that an Enterprise would be subject to enforcement action if it drew down this going-concern buffer. In contrast, under the proposed rule, drawing down the stress capital buffer generally would trigger only limits on capital distributions and discretionary bonus payments. By prescribing less severe sanctions for drawing down this buffer during a period of financial stress, the proposed rule's approach should help position an Enterprise to fulfill its statutory mission across the economic cycle and also dampen the pro-cyclicality of the aggregate risk-based capital requirements. FHFA is also seeking comment on whether to periodically re-size the stress capital buffer, similar to the approach recently adopted by the U.S. banking regulators,

to the extent that FHFA's eventual program for supervisory stress tests determines that an Enterprise's peak capital exhaustion under a severely adverse stress would exceed 0.75 percent of adjusted total assets.

See e.g. Federal Reserve Board Regulations Q, Y, and YY: Regulatory Capital, Capital Plan, and Stress Test Rules Final Rule,

85 FR 15576 (Mar. 18, 2020).

• The countercyclical capital buffer amount initially would be set at 0 percent of the Enterprise's adjusted total assets. FHFA does not expect to adjust this buffer in the place of, or to supplement, the countercyclical adjustment to the risk-based capital requirements. Instead, as under the Basel and U.S. banking frameworks, FHFA would adjust the countercyclical capital buffer taking into account the macro-financial environment in which the Enterprises operate, such that it

would be deployed only when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk. This focus on excess aggregate credit growth means the countercyclical buffer likely would be deployed on an infrequent basis, and generally only when similar buffers are deployed by the U.S. banking regulators.

• An Enterprise's stability capital buffer would be tailored to the risk that the Enterprise's default or other financial distress could have on the liquidity, efficiency, competitiveness, or resiliency of national housing finance markets. FHFA is proposing a stability capital buffer based on the Enterprise's share of residential mortgage debt outstanding, and seeking comment on an alternative based on the U.S. banking framework's methodology. Under either methodology, the stability capital buffer would be a percent of adjusted total assets. Under the market share approach, as of September 30, 2019, Freddie Mac's and Fannie Mae's stability capital buffers would have been, respectively, 0.64 and 1.05 percent of adjusted total assets.

Fixing the PCCBA at a specified percent of an Enterprise's adjusted total assets, instead of risk-weighted assets, is a notable departure from the Basel framework. FHFA intends a fixed-percent PCCBA, among other things, to reduce the impact that the PCCBA potentially could have on higher risk exposures, to avoid amplifying the secondary effects of any model or similar risks inherent to the calibration of granular risk weights for mortgage exposures, and to further mitigate the pro-cyclicality of the aggregate risk-based capital requirements.

Finally, to avoid limits on capital distributions and discretionary bonus payments, the Enterprise also would be required to maintain tier 1 capital in excess of the amount required under its tier 1 leverage ratio requirement by at least the amount of its prescribed leverage buffer amount (PLBA). The PLBA would equal 1.5 percent of the Enterprise's adjusted total assets, such that the PLBA-adjusted leverage ratio requirement would remain a credible backstop to the PCCBA-adjusted risk-based capital requirements.

C. Key Enhancements

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 CRT structures, including a minimum capital requirement on senior tranches of CRT retained by an Enterprise and an adjustment to reflect that CRT does not have the same loss-absorbing capacity as equity capital.

• The addition of a credit risk capital requirement for Enterprise crossholdings of mortgage-backed securities (MBS).

• 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.

D. Sizing of Regulatory Capital Expectations

1. Aggregate Regulatory Capital

Table 1 details how much regulatory capital the Enterprises together would have been required to maintain under the proposed rule as of September 30, 2019 to avoid restrictions on capital distributions and discretionary bonus payments.

The analogous breakdown of requirements by Enterprise is included in Section XII.A.

EP30JN20.000

Table 1 shows a combined Enterprise statutory total risk-based capital requirement of $135 billion (8 percent of risk-weighted assets). The statutory risk-based capital framework does not include any capital buffers. In contrast, the supplementary risk-based capital framework includes three capital requirements (CET1, tier 1, and adjusted total capital) along with three capital buffers (countercyclical, stress capital, and stability) that comprise the PCCBA. While the capital buffers are not strictly a capital requirement, they would materially increase the regulatory capital that each Enterprise would have to maintain to avoid restrictions on capital distributions and discretionary bonuses.

Focusing on high-quality capital, the combined Enterprise CET1 capital requirement was $76 billion (4.5 percent of risk-weighted assets), the tier 1 capital requirement was $101 billion (6 percent of risk-weighted assets), and the adjusted total capital requirement was $135 billion (8 percent of risk-weighted assets). The combined PCCBA was $99 billion, comprising the $46 billion stress capital buffer, $53 billion stability capital buffer, and $0 countercyclical capital buffer. The capital requirements and PCCBA totaled $175 billion for CET1 capital, $200 billion for tier 1 capital, and $234 billion for adjusted total capital. A more nuanced look at the importance of high-quality capital, and specifically how the Enterprises' supplemental capital measures would have evolved in relation to their statutory capital measures leading up to the 2008 financial crisis, is included in Section III.B.3.

Table 1 then shows a combined leverage ratio requirement of $152 billion under the proposed rule. Both the core capital and supplementary tier 1 leverage ratio requirements are equal to 2.5 percent of adjusted total assets, so there is no difference between the two leverage ratio requirements. However, there are important differences between core capital and tier 1 capital related to the loss-absorbing capacity of each capital metric, as discussed in Section V.B.

The supplementary framework also includes a tier 1 capital PLBA equal to 1.5 percent of adjusted total assets, or $91 billion for the Enterprises combined. In aggregate, the Enterprises' combined tier 1 leverage ratio requirement and PLBA would have been $243 billion as of September 30, 2019.

2. 2018 Proposal's Capital Requirements

Table 2 presents estimates of the Enterprises' combined regulatory capital under the proposed rule broken out by risk category and asset category as of September 30, 2019. Table 2 also presents estimates of the Enterprises' combined capital requirements under the 2018 proposal, both as of September 30, 2017—the as-of date in the 2018 proposal—and as of September 30, 2019.

A more detailed walk-forward from the capital requirements in the 2018 proposal to the capital requirements under the proposed rule is presented for each Enterprise in Section XII.

EP30JN20.001

Table 2 shows an estimated combined risk-based capital requirement of $135.1 billion, or 2.22 percent of the Enterprises' adjusted total assets, under the proposed rule as of September 30, 2019, then provides a further breakdown by risk category. Net credit risk capital accounts for $134.9 billion before CRT and $112.8 billion after CRT, market risk capital accounts for $13.6 billion, and operational risk capital accounts for $8.7 billion. The DTA requirement is zero as of September 30, 2019.

Using the same September 30, 2019 portfolio date, the combined risk-based capital requirement under the 2018 proposal would have been similar to the combined risk-based capital requirement under the proposed rule. The differences in required regulatory capital between the two proposals are in post-CRT net credit risk capital (+45.0 billion), removal of the going-concern buffer (−$43.5 billion), operational risk (+$4.1 billion), and DTA (−$7.4 billion). The capital requirement for market risk was unchanged. Primary drivers of the $45.0 billion increase in post-CRT net credit risk capital are a new prudential floor on the credit risk capital requirement for mortgage exposures and refinements to the capital treatment of CRT structures, including a minimum capital requirement on senior tranches of CRT retained by an Enterprise. A caveat to this comparison is that the 2018 proposal increased the total capital requirement by a DTA offset, while the proposed rule, consistent with the Basel framework, proposes instead to deduct the amount of that DTA offset from CET1 capital (and therefore tier 1 and adjusted total capital). The 2018 proposal's $136.9 billion combined risk-based capital requirement would have been, in effect, $129.5 billion under the DTA approach of the proposed rule.

In contrast to the 2018 proposal, the proposed rule includes a set of three buffers that would materially increase the regulatory capital that each Enterprise would have to maintain to avoid restrictions on capital distributions and discretionary bonuses. The proposed rule's stress capital buffer of $45.5 billion replaces the 2018 proposal's $43.5 billion going-concern buffer, and is complemented by the stability capital buffer of $53.3 billion and the countercyclical capital buffer that is currently set to zero. The three buffers in aggregate form the PCCBA, which totals $98.8 billion for the Enterprises combined, or 1.63 percent of the adjusted total assets. The aggregate risk-based capital requirement and PCCBA is a combined $234.3 billion under the proposed rule, or 3.86 percent of the Enterprises' adjusted total assets.

EP30JN20.002

Table 3 again shows an estimated combined risk-based capital requirement of $135.1 billion, or 2.22 percent of the Enterprises' adjusted total assets under the proposed rule as of September 30, 2019, then provides a further breakdown by asset category. The Enterprises' combined risk-based capital requirement for single-family mortgage exposures is $111.0 billion under the proposed rule, while the combined risk-based capital requirement for multifamily mortgage exposures is $17.8 billion. In addition, the combined risk-based capital requirements for DTA and other assets under the proposed rule is zero and $6.3 billion, respectively.

Excluding the going-concern buffer, which was a capital requirement in the 2018 proposal but has been replaced by the stress capital buffer in the proposed rule, the combined risk-based capital requirements under the 2018 proposal for the single-family and multifamily businesses were $67.8 billion and $12.2 billion, respectively, as of September 30, 2019. As discussed above and shown in Table 3, the enhancements in the proposed rule would have increased the required capital for single-family assets and multifamily assets by $43.2 billion and $5.6 billion, respectively. Similarly, the risk-based capital requirement for other assets has increased by $0.2 billion. Finally, the risk-based capital requirement for DTA decreased by $7.4 billion in the proposed rule due to its new capital treatment.

The pro-cyclicality of the 2018 proposal's risk-based capital requirements complicates comparisons to the proposed rule. Under the 2018 proposal, the Enterprises would have likely found it necessary to maintain a considerable capital surplus in anticipation of a financial stress. One Enterprise's comment letter suggested that its total capital requirement would be expected to increase as much as 80

percent in a severely adverse stress.

The amount of this managerial cushion would have depended on the extent to which the Enterprises viewed it to be potentially costly or difficult to raise new capital in the midst of a financial stress.

The 2018 proposal's enforcement framework amplified the necessity of a managerial cushion by incorporating the going-concern buffer into the capital requirements, a violation of which could trigger significant regulatory sanctions. In contrast, the proposed rule converts the going-concern buffer into a stress capital buffer that an Enterprise may draw down during a period of financial stress. Because a managerial cushion in anticipation of an eventual stress would have been a practical, if not legal, necessity for the Enterprises, comparisons to the 2018 proposal should start with a reasonable assumption regarding the amount of this capital surplus.

See

Comment Letter from Fannie Mae at 2 (Nov. 15, 2018).

Id.

at 2 (“To ensure adequate capital in such a scenario, any Regulated Institution would need to hold a sizeable capital surplus during more normal economic environments. The need for such a surplus is real, because consistent with their mission, the Regulated Institutions must maintain a constant presence in the housing market and would want to avoid being forced to raise capital in times of stress.”).

On the one hand, the managerial cushion likely to be held by an Enterprise to mitigate the problem of having to raise regulatory capital in a period of financial stress could be considered a mitigant to safety and soundness risk. On the other hand, significant reductions in credit risk capital requirements due to sustained periods of house price growth and favorable economic conditions could contribute to safety and soundness risk.

FHFA is cognizant that the leverage ratio requirements would currently exceed the risk-based capital requirements. FHFA has settled on this calibration of the leverage ratio requirements after considerable deliberation. The leverage ratio requirements are intended to serve as non-risk-based measures that provide a credible backstop to the risk-based capital requirements to safeguard against model risk and measurement error with a simple, transparent, independent measure of risk. The leverage ratio requirements would have the added benefit of dampening some of the pro-cyclicality inherent in the risk-based capital requirements. As discussed in Section VI.B.3, FHFA has sized the leverage ratio requirements to be a credible backstop to the risk-based capital requirements, taking into account considerations relating to the Enterprises' historical loss experiences, the model and related risks posed by the calibration of the risk-based capital requirements, and the analogous leverage ratio requirements under the U.S. banking framework and of the Federal Home Loan Banks. If the leverage ratio requirements are to be a credible backstop, there will inevitably be periods when leverage ratio requirements require more regulatory capital than the risk-based capital requirements, as is the case as of September 30, 2019. FHFA believes that mortgage market conditions as of September 30, 2019 reflect circumstances consistent with a period under which a credible leverage ratio would be binding, given the exceptional single-family house price appreciation since 2012, the unemployment rate at an historically low level, the strong credit performance of mortgage exposures as of that time, the significant progress by the Enterprises to materially reduce legacy exposure to non-performing loans (NPLs) and re-performing loans, robust CRT market access enabling substantial risk transfer, and the generally strong condition of key counterparties, such as mortgage insurers.

In 2008, the entire net worth of both Enterprises was depleted by losses. The U.S. Department of the Treasury (Treasury Department) invested in senior preferred stock of both Enterprises to offset the losses. Fannie Mae drew $116 billion from the Treasury between 2008 and the fourth quarter of 2011, while Freddie Mac drew $71 billion between 2008 and the first quarter of 2012.

Peak cumulative capital losses are defined as cumulative losses, net of revenues earned, between 2008 and the respective date at which an Enterprise no longer required draws under the PSPA.

3. 2008 Financial Crisis Loss Experience

This section examines the peak cumulative capital losses of each Enterprise relative to several different regulatory capital metrics: The statutory risk-based and leverage ratio requirements applicable to the Enterprise in 2007; the aggregate risk-based capital (requirement plus the PCCBA) under the proposed rule but without the contemplated single-family countercyclical adjustment; and the aggregate leverage capital (requirement plus the PLBA) under the proposed rule but without the contemplated single-family countercyclical adjustment.

As discussed in Section IV.B.2, under the 2018 proposal, Fannie Mae's and Freddie Mac's peak losses would have left, respectively, only $3 billion and $12 billion in remaining capital, not enough to have sustained the market confidence necessary for either Enterprise to continue as a going concern.

EP30JN20.003

Table 4 shows that as of December 31, 2007, Fannie Mae's statutory risk-based capital requirement was $25 billion, or 0.8 percent of adjusted total assets. The Enterprise's statutory minimum leverage ratio requirement was $42 billion, or 1.4 percent of adjusted total assets. For comparison, as of the same date, Fannie Mae's proposed risk-based measures (adjusted total capital requirement plus PCCBA) would have been $209 billion or 6.9 percent of adjusted total assets, and the proposed leverage measures (leverage ratio requirement plus PLBA) would have been $122 billion or 4.0 percent of adjusted total assets. While the leverage measure would have fallen $45 billion short of Fannie Mae's peak cumulative capital losses of $167 billion (5.5 percent of adjusted total assets), the proposed risk-based measures would have exceeded those peak losses by $42 billion. These comparisons are subject to the caveat that Fannie Mae's $167 billion in peak cumulative capital losses include a valuation allowance on DTAs of $64 billion. Because much of Fannie Mae's DTAs would have been deducted from adjusted total capital and tier 1 capital, the adjusted total capital and tier 1 capital that actually would have been exhausted during the 2008 financial crisis would have been considerably less than the $167 billion in peak cumulative capital losses reflected in Table 4.

EP30JN20.004

Table 5 shows that as of December 31, 2007, Freddie Mac's statutory risk-based capital requirement was $14 billion, or 0.6 percent of adjusted total assets. The Enterprise's statutory minimum leverage ratio requirement was $34 billion, or 1.6 percent of adjusted total assets. For comparison, as of the same date, Freddie Mac's proposed risk-based measures (adjusted total capital requirement plus PCCBA) would have been $128 billion or 5.9 percent of adjusted total assets, and the proposed leverage measures (leverage ratio requirement plus PLBA) would have been $87 billion or 4.0 percent of adjusted total assets. While the leverage measure would have fallen $11 billion short of Freddie Mac's peak cumulative capital losses of $98 billion (4.5 percent of adjusted total assets), the proposed risk-based measures would have exceeded those peak losses by $30 billion. These comparisons are subject to the caveat that Freddie Mac's $98 billion in peak cumulative capital losses include a valuation allowance on DTAs of $34 billion. Because much of Freddie Mac's DTAs would have been deducted from adjusted total capital and tier 1 capital, the adjusted total capital and tier 1 capital that actually would have been exhausted during the 2008 financial crisis would have been considerably less than the $98 billion in peak cumulative capital losses reflected in Table 5.

As discussed in Section VIII.A.4, FHFA is proposing that the base risk weights for single-family mortgage exposures would be subject to a countercyclical adjustment due to MTMLTV adjustments an Enterprise would be required to make when national house prices deviate by more than 5.0 percent above or below an estimated inflation-adjusted long-term trend. It is important to note that any additional regulatory capital that would have been required under the proposed single-family countercyclical adjustment is not included in the estimates of regulatory capital in either Tables 4 or 5. Looking back, it is likely that, given the considerable house price appreciation in the decade before the financial crisis, this countercyclical adjustment would have been in effect as of December 31, 2007. However, there are too many unknowns to quantify with any reasonable degree of certainty what that effect would have been, how the Enterprises' actions might have changed because of it, and how changes in the actions of the Enterprises might have affected the overall market. Therefore, FHFA is presenting the estimates without including a countercyclical adjustment, and acknowledging that with the countercyclical adjustment in place, the Enterprises would likely have had an even larger capital surplus relative to their peak cumulative capital losses than is presented in Tables 4 and 5.

III. Background

A. Pre-Crisis Regulatory Capital Framework

The Safety and Soundness Act established FHFA's predecessor agency, the Office of Federal Housing Enterprise Oversight (OFHEO), as the safety and soundness regulator of the Enterprises. As originally enacted, the Safety and Soundness Act specified a minimum capital requirement for the Enterprises

in the form of a leverage ratio requirement set in statute at an amount equal to the sum of 2.5 percent of on-balance sheet assets and 0.45 percent of credit guarantees of MBS held by outside investors. OFHEO did not have the authority to adjust this minimum capital requirement.

The Safety and Soundness Act also required OFHEO to establish by regulation a risk-based capital stress test such that each Enterprise could survive a ten-year period with credit losses arising out of a prolonged regional stress

and large movements in interest rates.

Over a 7-year period, OFHEO issued a series of

Federal Register

notices to solicit public comments on the risk-based capital stress test regulation, eventually finalizing the rule in 2001. The final risk-based capital requirements, however, had little practical impact. The capital required under the statutory leverage ratio requirement consistently exceeded the capital required under OFHEO's risk-based regulation, in large part due to the prescriptive restrictions imposed by statute on the underlying stress scenario and also due to model risk-related failures to update the underlying data and model calibrations.

This pre-crisis regulatory capital framework would soon prove inadequate.

The statutory stress scenarios contemplated a period in which “losses occur throughout the United States at a rate of default and severity (based on any measurements of default reasonably related to prevailing practice for that industry in determining capital adequacy) reasonably related to the rate and severity that occurred in contiguous areas of the United States containing an aggregate of not less than 5 percent of the total population of the United States that, for a period of not less than 2 years, experienced the highest rates of default and severity of mortgage losses, in comparison with such rates of default and severity of mortgage losses in other such areas for any period of such duration.” Safety and Soundness Act section 1361(a) (as in effect before amended by HERA).

The statutory stress scenarios contemplated two periods: (i) A period in which the 10-year Treasury yield decreased to the lesser of 600 basis points below the average yield during the preceding 9 months or 60 percent of the average yield during the preceding three years; and (ii) a period in which the 10-year Treasury yield increased to the greater of 600 basis points above the average yield during the preceding 9 months or 160 percent of the average yield during the preceding three years.

Id.

See

W. Scott Frame et al,

The Failure of Supervisory Stress Testing: Fannie Mae, Freddie Mac, and OFHEO

(Working Paper 2015-3) at 3, available at

https://www.frbatlanta.org/-/media/documents/research/publications/wp/2015/03.pdf.

B. Lessons of the 2008 Financial Crisis

Starting in 2006, house prices in some regional markets began to decline, mortgage defaults began to rise, and the Enterprises began to incur credit and mark-to-market losses. In 2007, housing price declines spread across the nation, and issuances of private-label securities (PLS) largely ceased. The Enterprises' losses continued to mount into 2008, their share prices rapidly fell, and the spreads on their unsecured debt and mortgage-backed securities (MBS) widened.

In July 2008, following growing concern about the Enterprises' solvency, Congress passed HERA, establishing FHFA as the regulator for the Enterprises and authorizing the Treasury Department to support the Enterprises through purchases of their obligations and other securities. On September 6, 2008, FHFA used its new authorities under HERA to place each Enterprise into conservatorship. The next day, the Treasury Department exercised its HERA authority to enter into Senior Preferred Stock Purchase Agreements (each a PSPA) to support the Enterprises. The Enterprises ultimately required $191.5 billion in cash draws from the Treasury Department under the PSPAs.

1. Capital Adequacy

The scale of the Enterprises' capital exhaustion during the 2008 financial crisis is critically relevant to the capital necessary to ensure that each Enterprise operates in a safe and sound manner and is positioned to fulfill its statutory mission across the economic cycle.

As discussed in Section II.D.3, the Enterprises' crisis-era cumulative capital losses peaked at $265 billion, approximately 4.8 percent of their total assets as of December 31, 2007. Setting aside the valuation allowances on their DTAs, which are subject to deductions and other adjustments to regulatory capital under the proposed rule, the Enterprises' peak cumulative capital losses were $167 billion, approximately 3.0 percent of their total assets as of December 31, 2007.

The Enterprises' crisis-era cumulative capital losses, while significant, could have been greater. The Enterprises' losses were likely mitigated by unprecedented federal government support of the housing market and the economy during the crisis, including the Home Affordable Modification Program, the Troubled Asset Relief Program, the 2009 stimulus package,

and the Federal Reserve System's purchases of more than $1.2 trillion of the Enterprises' debt and MBS from January 2009 to March 2010. The Enterprises' losses also were likely dampened by the declining interest rate environment of the period, when the interest rates on 30-year fixed-rate mortgage loans declined by approximately 200 basis points through the end of 2011, facilitating re-financings and loss mitigation programs.

See

American Recovery and Reinvestment Act of 2009, Public Law 111-5, 123 Stat. 115 (2009).

The average interest rate on 30-year mortgage loans was approximately 6.14 percent at the end of 2007, and fell to 4.2 percent toward the end of October 2011. Over this period, yields on 10-year Treasuries fell from approximately 3.88 percent at the end of 2008 to 2.06 percent at the end of October 2011.

The Enterprises did later recoup a portion of the underlying valuation adjustments and other losses. However, peak cumulative capital losses are relevant to assessing the amount of capital that creditors and other counterparties would require to regard the Enterprises as viable going concerns throughout the duration of another severe economic downturn. Indeed, the Enterprises were still operating and able to recoup some of these losses only because the Treasury Department's support through the PSPAs kept them solvent going concerns.

2. Going-Concern Standard

The Enterprises' crisis-era funding difficulties established that each Enterprise must be capitalized to remain a viable going concern both during and after a severe economic downturn. Calibrating capital adequacy based on “claims paying capacity” or an insurance-like or similar standard that does not emphasize a going-concern standard is inconsistent with this lesson of the crisis in at least two respects.

First, the Enterprises fund themselves with a significant amount of short-term unsecured debt that must be regularly refinanced. Each Enterprise's funding needs are very likely to increase during an economic downturn, all else equal, as the Enterprise funds purchases of NPLs out of securitization pools. This is a funding need that peaked at $345 billion in 2010.

These ordinary course and pro-cyclical funding needs can be met only if the Enterprise continues to be regarded as a viable going concern by creditors throughout the duration of a financial stress. Creditors will be most skeptical of an Enterprise's continued solvency during periods of market turmoil, and it was the increase in the Enterprises' borrowing costs and the associated difficulties that the Enterprises faced in refinancing their debt that were among the most immediate grounds for FHFA placing the Enterprises into conservatorship.

See Memorandum dated September 6, 2008 re: Proposed Appointment of the Federal Housing Finance Agency as Conservator for the Fannie Mae

at 29 (“The Enterprise's practice of relying upon repo financing of its agency collateral to raise cash in the current credit and liquidity environment is

an unsafe or unsound practice that has led to an unsafe or unsound condition, given the unavailability of willing lenders to provide secured financing in significant size to reduce pressure on its discount notes borrowings.”); and

Memorandum dated September 6, 2008 re: Proposed Appointment of the Federal Housing Finance Agency as Conservator for the Freddie Mac

at 28 (“The Enterprise's prolonged reliance almost exclusively on 30-day discount notes is an untenable long-term source of funding and an unsafe or unsound practice that poses abnormal risk to the viability of the Enterprise. Operating without an adequate liquidity funding contingency plan is an unsafe or unsound condition to transact business.”); and Fin. Crisis Inquiry Comm'n, The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States at 316 (2011) (the FCIC Report), available at

https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf

; (“In July and August 2008, Fannie suffered a liquidity squeeze, because it was unable to borrow against its own securities to raise sufficient cash in the repo market.”);

see id.

at 316 (“By June 2008, the spread [between the yield on the GSEs' long-term bonds and rates on Treasuries] had risen 65 percent over the 2007 level; by September 5, just before regulators parachuted in, the spread had nearly doubled from its 2007 level to just under 1 percent, making it more difficult and costly for the GSEs to fund their operations.”).

Second, only a going-concern capital adequacy standard can ensure that each Enterprise will be positioned to fulfill its statutory mission to provide stability and ongoing assistance to the secondary mortgage market across the economic cycle. The Enterprises were not positioned to effectively support the secondary mortgage market as their financial conditions deteriorated in 2007 and 2008.

In an attempt to enable the Enterprises to continue to support the secondary mortgage market, OFHEO relaxed the mortgage portfolio caps and reduced a capital buffer that had been imposed by consent order.

See

FCIC Report at 311, available at

https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf

; (“Few doubted Fannie and Freddie were needed to support the struggling housing market. The question was how to do so safely. Purchasing and guaranteeing risky mortgage-backed securities helped make money available for borrowers, but it could also result in further losses for the two huge companies later on. `There's a real tradeoff,' Lockhart said in late 2007—a trade-off made all the more difficult by the state of the GSEs' balance sheets.'”);

Statement of FHFA Director James B. Lockhart at News Conference Announcing Conservatorship of Fannie Mae and Freddie Mac

(Sept. 7, 2008), available at

https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-of-FHFA-Director-James-B--Lockhart-at-News-Conference-Annnouncing-Conservatorship-of-Fannie-Mae-and-Freddie-Mac.aspx

; (“Unfortunately, as house prices, earnings and capital have continued to deteriorate, their ability to fulfill their mission has deteriorated . . . . The result has been that they have been unable to provide needed stability to the market. They also find themselves unable to meet their affordable housing mission.”);

id.

(“The lack of confidence has resulted in continuing spread widening of their MBS, which means that virtually none of the large drop in interest rates over the past year has been passed on to the mortgage markets.”).

News Release, OFHEO, Fannie Mae and Freddie Mac Announce Initiative to Increase Mortgage Market Liquidity

(Mar. 19, 2008), available at

https://www.fhfa.gov/Media/PublicAffairs/Pages/OFHEO,-Fannie-Mae-and-Freddie-Mac-Announce-Initiative-to-Increase-Mortgage-Market-Liquidity.aspx

; (“OFHEO estimates that Fannie Mae's and Freddie Mac's existing capabilities, combined with this new initiative and the release of the portfolio caps announced in February, should allow the GSEs to purchase or guarantee about $2 trillion in mortgages this year.”).

3. High-Quality Capital

Another lesson of the 2008 financial crisis is that it is not only the quantity but also the quality of the regulatory capital, especially its loss-absorbing capacity, that is critical to the Enterprises' safety and soundness. Market confidence in the Enterprises came into doubt in mid-2008 when Fannie Mae and Freddie Mac had total capital of, respectively, $55.6 billion and $42.9 billion. Questions about the Enterprises' solvency likely arose in part due to their sizeable DTAs, which counted toward total capital but had less loss-absorbing capacity during a period of negative income. Freddie Mac would have actually had a negative book value as of June 30, 2008 after deducting its DTAs. Besides the DTA valuation allowances, there was also uncertainty as to the sufficiency of the Enterprises' allowances for loan losses (ALLL).

For these and other reasons, the Basel framework includes deductions and other adjustments for DTAs and ALLL, as well as other capital elements that might have less loss-absorbing capacity.

See FCIC Report

at 317, available at

https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf

; (“[T]he Fed found that the GSEs were significantly `underreserved,' with huge potential losses . . . The OCC rejected the forecasting methodologies on which Fannie and Freddie relied. Using its own metrics, it found insufficient reserves for future losses . . . .”).

See

BCBS,

The Basel Framework

CAP10 (Dec. 15, 2019), available at

https://www.bis.org/basel_framework/chapter/CAP/10.htm?inforce=20191215&export=pdf; see also

BCBS,

Basel: A Global Regulatory Framework for More Resilient Banks and Banking Systems, paragraphs 8 and 9,

(Dec. 2010; revised June 2011), available at

http://www.bis.org/publ/bcbs189.htm

; (“The crisis demonstrated that credit losses and writedowns come out of retained earnings, which is part of banks' tangible common equity base . . . . To this end, the predominant form of Tier 1 capital must be common shares and retained earnings.”).

Table 6 illustrates the importance of requiring high-quality capital by showing the evolution of CET1 capital, tier 1 capital, adjusted total capital, core capital, and total capital at each Enterprise leading up to the 2008 financial crisis. As the table indicates, the Enterprises' combined core capital increased from $77.3 billion in 2006 to $84.1 billion in 2008, suggesting at first glance a position of some financial strength. However, over the same time period the Enterprises' combined tier 1 capital decreased markedly from $76.3 billion to $24.1 billion, indicating a capital position with deteriorating and substantially less loss-absorbing capacity. Similarly, the Enterprises' combined total capital increased from $78.7 billion in 2006 to $98.5 billion in 2008, while over the same time period the Enterprises' adjusted total capital decreased from $85.9 billion to $29.6 billion.

EP30JN20.005

4. Stability of the National Housing Finance Markets

After the taxpayer-funded rescue of the Enterprises in 2008, there can be no doubt as to the risk posed by an insolvent or otherwise financially distressed Enterprise to the stability of the national housing finance markets. The Enterprises were then, and remain today, the dominant participants in the housing finance system, owning or guaranteeing 37 percent of residential mortgage debt outstanding as of December 31, 2007 and 44 percent of residential mortgage debt outstanding as of September 30, 2019. Both then and still today, banks, insurance firms, and securities broker-dealers own significant amounts of the Enterprises' unsecured debt and MBS. Both then and still today, the Enterprises control critical infrastructure for securitizing and administering $5.5 trillion of outstanding single-family and multifamily conventional MBS.

Given the nature, scope, size, scale, concentration, and interconnectedness of each Enterprise, the financial distress of an Enterprise could have significant adverse effects on the liquidity, efficiency, competitiveness, or resiliency of national housing finance markets. For these and related reasons, the Treasury Department ultimately invested $191.5 billion under the PSPAs in the Enterprises to keep them solvent going concerns.

During the conservatorship, some of that functionality has been moved to the Common Securitization Platform, which is jointly owned and operated by the Enterprises. In January 2020, FHFA announced that it had directed the Enterprises to amend the governance of the entity that operates the Common Securitization Platform to include an independent, non-executive chairman of the board of directors and add up to three additional independent directors.

C. Post-Crisis Changes to Regulatory Capital Frameworks

After the 2008 financial crisis, financial services regulators in the U.S. and internationally revisited their regulatory capital frameworks to address lessons learned. The international efforts of the leading banking regulators through the BCBS culminated in 2010 in enhancements to the Basel framework.

That comprehensive reform package was designed to improve the quality and quantity of regulatory capital and to build additional capacity into the banking system to absorb losses during future periods of financial stress. Revisions to the international capital standards included a more restrictive definition of regulatory capital, higher regulatory capital requirements, a capital conservation buffer that could be drawn down during periods of financial stress, and also capital surcharges for systemic importance.

See

BCBS,

Basel: A Global Regulatory Framework for More Resilient Banks and Banking Systems

(Dec. 2010; revised June 2011), available at

http://www.bis.org/publ/bcbs189.htm.

With respect to the Enterprises, HERA gave FHFA greater authority to determine capital standards for the Enterprises by removing the Safety and Soundness Act's restrictions on the risk-based capital requirements and by giving FHFA authority to increase leverage ratio requirements above the statutory minimum. Each Enterprise was placed into conservatorship shortly after enactment of HERA, and FHFA suspended the Enterprises' statutory capital classifications and regulatory capital requirements. FHFA, in its capacity as conservator, then began to develop a framework known as the Conservatorship Capital Framework to ensure that each Enterprise assumed appropriate regulatory capital requirements in managing their businesses. The Conservatorship Capital Framework was implemented in 2017, and ultimately was the foundation of the 2018 proposal.

IV. Rationale for Re-Proposal

FHFA is re-proposing the regulatory capital framework for the Enterprises for three key reasons:

• First, FHFA has begun the process to responsibly end the conservatorships of the Enterprises. This policy change is a departure from the expectations of interested parties at the time of the 2018 proposal, when the prospects for indefinite conservatorships informed comments and perhaps even the decision whether to comment at all.

• Second, FHFA is proposing to increase the quantity and quality of the regulatory capital at the Enterprises to ensure the safety and soundness of each Enterprise and that each Enterprise can fulfill its statutory mission to provide stability and ongoing assistance to the secondary mortgage market across the economic cycle, in particular during periods of financial stress.

• Third, to facilitate regulatory capital planning and also in furtherance of the safety and soundness of the Enterprises and their countercyclical mission, FHFA is proposing changes to mitigate the pro-cyclicality of the aggregate risk-based capital requirements of the 2018 proposal.

While these enhancements preserve the 2018 proposal as the foundation of the Enterprises' regulatory capital framework, FHFA has nonetheless determined to solicit comments on this revised framework in its entirety in light of the changed policy environment, the extent and nature of the enhancements, the technical nature of the underlying issues, the diverse range of interested parties, and the critical importance of the Enterprises' regulatory capital framework to the national housing finance markets.

A. Responsibly Ending the Conservatorships

FHFA stated in the 2018 proposal that “this proposed rule is not a step towards recapitalizing the Enterprises and administratively releasing them from conservatorship.”

FHFA also noted that “[p]ublication of this proposed rule will assist with FHFA's administration of the conservatorships of Fannie Mae and Freddie Mac by potentially refining the [Conservatorship Capital Framework].”

It is possible that these and other statements made by FHFA, as well as the generally prevailing uncertainty at the time as to the Enterprises' prospects for exiting conservatorships, might have influenced interested parties' views as to the practical relevance of the 2018 proposal or otherwise dissuaded the submission of some comments. In fact, more than half of the comments on the 2018 proposal related to the ongoing conservatorships rather than the proposed regulatory capital framework.

83 FR at 33313.

Id.

The policy environment has since changed. In September 2019, the Treasury Department released its housing reform plan that recommended that FHFA begin the process to end each Enterprise's conservatorship in a manner consistent with the preconditions set forth in that plan, and also recommended a recapitalization plan be developed for each Enterprise.

Shortly thereafter, the Treasury Department and FHFA, on behalf of each Enterprise in its capacity as conservator, entered into letter agreements permitting the Enterprises to together retain up to $45 billion in capital. In October 2019, FHFA then issued a new Strategic Plan and Scorecard for the Enterprises that stated that “[e]nding the conservatorships of Fannie Mae and Freddie Mac is a central and necessary element of this new roadmap.”

Treasury, Housing Reform Plan at 27 (Sept. 2019), available at

https://home.treasury.gov/system/files/136/Treasury-Housing-Finance-Reform-Plan.pdf.

These developments were important factors in FHFA's decision to re-propose the regulatory capital framework in its entirety. FHFA considered extensively the comments received on the 2018 proposal and made significant adjustments to multiple aspects of the proposed regulatory capital framework in response to the comments received. FHFA now hopes and expects that the clarity as to the Enterprises' eventual exit from conservatorship will lead to new, different, and more extensive comments. To that end, FHFA emphasizes that the purpose of the proposed rule is to establish a regulatory capital framework that ensures the safety and soundness of each Enterprise and that each Enterprise is positioned to fulfill its statutory mission across the economic cycle, in particular during periods of financial stress.

B. Ensuring Capital Adequacy

1. Quality of Capital

As discussed in Section III.B.3, a lesson of the 2008 financial crisis is that the Enterprises' safety and soundness depends not only on the quantity but also on the quality of their regulatory capital. In light of the lessons learned, FHFA has determined enhancements are necessary to address two key concerns with respect to the quality of the Enterprise's regulatory capital.

First, enhancements are necessary to limit the amount of regulatory capital that may consist of certain components of capital such as DTAs that might tend to have less loss-absorbing capacity during a period of financial stress. FHFA noted in the 2018 proposal that the Enterprises' DTAs, which are included in total capital and core capital by statute, “may provide minimal to no loss-absorbing capability during a period of [financial] stress as recoverability (via taxable income) may become uncertain.”

The 2018 proposal addressed this issue by establishing a risk-based capital requirement for DTAs. However, the 2018 proposal did not include adjustments for other capital elements that tend to have less loss-absorbing capacity during a financial stress (

e.g.,

ALLL, goodwill, and intangibles). The 2018 proposal also did not adjust for accumulated other comprehensive income (AOCI), leaving open the possibility that an Enterprise could have positive total capital and core capital despite being insolvent under GAAP, though FHFA did request comment on whether to include offsetting capital requirements to AOCI similar to the treatment of DTAs.

83 FR at 33388. Deducting the Enterprises' DTAs from their $98.5 billion in total capital in mid-2008 in a manner generally consistent with the U.S. banking regulators' approach would have left the Enterprises with little regulatory capital, reflective of the financial distress that the Enterprises were experiencing at the time and also consistent with the $53.8 billion in capital reductions realized a few months later with the valuation allowances on the Enterprises' DTAs.

Second, the statutory definitions of regulatory capital used in the 2018 proposal did not limit the extent to which preferred shares could satisfy the risk-based capital requirements. Specifically, there was neither a risk-based capital requirement for core capital nor a requirement that retained earnings and other common equity be the predominant form of capital, as under the Basel framework.

The 2018 proposal sought feedback on this issue and commenters recommended FHFA limit the inclusion of preferred shares in regulatory capital to align with the U.S. banking framework's definition of tier 1 capital.

See

BCBS,

Basel: A Global Regulatory Framework for More Resilient Banks and Banking Systems, paragraphs 8 and 9

(

Dec.

2010; revised June 2011), available at

http://www.bis.org/publ/bcbs189.htm;

(“It is critical that banks' risk exposures are backed by a high quality capital base. The crisis demonstrated that credit losses and writedowns come out of retained earnings, which is part of banks' tangible common equity base . . . . To this end, the predominant form of Tier 1 capital must be common shares and retained earnings.”).

To address these and related concerns, and as described in more detail in Section V.B., FHFA is proposing to supplement the total capital and core capital requirements with additional capital requirements

based on the Basel framework's definitions of total capital, tier 1 capital, and CET1 capital. These supplemental capital requirements would include customary deductions and other adjustments for certain DTAs, goodwill, intangibles, and other assets that tend to have less loss-absorbing capacity during a financial stress. The risk-based tier 1 and CET1 capital requirements also would ensure that retained earnings and other high-quality capital are the predominant form of regulatory capital.

2. Quantity of Capital

FHFA has also determined enhancements to the 2018 proposal are necessary to ensure a safe and sound quantity of regulatory capital at each Enterprise. In particular, due in part to the lack of prudential floors on risk-based capital requirements and capital buffers, the 2018 proposal's credit risk capital requirements were insufficient to ensure the safety and soundness of each Enterprise and that each Enterprise could continue to fulfill its statutory mission during a period of financial stress. In determining the need for these enhancements, FHFA considered the following facts, among others:

•

Cumulative Crisis-Era Capital Losses.

Fannie Mae and Freddie Mac's peak cumulative capital losses from 2008 through 2011 and the first quarter of 2012, respectively, were, respectively, $167 billion and $98 billion. Had the 2018 proposal been in effect at the end of 2007, the 2018 proposal's risk-based capital requirements for Fannie Mae and Freddie Mac would have been, respectively, $171 billion and $110 billion. Fannie Mae and Freddie Mac's peak losses would have left, respectively, only $3 billion and $12 billion in remaining capital. At 0.1 percent and 0.5 percent of their total assets and off-balance sheet guarantees respectively, these amounts would not have sustained the market confidence necessary for the Enterprises to continue as going concerns, particularly given the prevailing stress in the financial markets at that time and also given the uncertainty as to the potential for other write-downs and the adequacy of the Enterprises' allowances for loan losses. Indeed, in October 2010, FHFA projected $90 billion in additional PSPA draws through 2013 under the baseline scenario, although only $34 billion in additional draws proved necessary.

See Fed. Hous. Fin. Agency, Projections of the Enterprises' Financial Performance

at 10 (Oct. 2010), available at

https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2010-10_Projections_508.pdf.

•

Single-family Credit Losses.

Freddie Mac's estimated single-family credit risk capital requirement under the 2018 proposal of $59 billion as of December 31, 2007 would have been less than its lifetime single-family credit losses of $64 billion on its December 31, 2007 guarantee portfolio. Even excluding loans that Freddie Mac no longer acquires, Freddie Mac's estimated single-family credit risk capital requirement of $24 billion under the 2018 proposal would have exceeded projected lifetime losses of $20 billion by only $4 billion (0.4 percent of the unpaid principal balance on the single-family book as of December 31, 2007). Fannie Mae's estimated single-family credit risk capital requirement under the 2018 proposal would have exceeded projected lifetime losses on its December 31, 2007 guarantee portfolio whether including or excluding loans that it no longer acquires, but only by $9 billion in both scenarios (0.4 percent and 0.7 percent, respectively, of the unpaid principal balance of the single-family book as of December 31, 2007).

•

Comparison to the Basel and U.S. Banking Frameworks.

Had the 2018 proposal been in effect on September 30, 2019, the average pre-CRT net credit risk capital requirement on the Enterprises' single-family mortgage exposures would have been 1.6 percent of unpaid principal balance, implying an average risk weight of 20 percent.

The U.S. banking framework generally assigns a 50 percent risk weight to single-family mortgage exposures to determine the credit risk capital requirement (equivalent to a 4.0 percent adjusted total capital requirement), while the current Basel framework generally assigns a 35 percent risk weight (equivalent to a 2.8 percent adjusted total capital requirement). Before adjusting for the capital buffers under the proposed rule and the Basel and U.S. banking frameworks, the Enterprises' regulatory capital requirements for single-family mortgage exposures under the 2018 proposal would have been 40 percent that of U.S. banking organizations and less than 60 percent that of non-U.S. banking organizations. The BCBS has finalized a more risk-sensitive set of risk weights for residential mortgage exposures, which are to be implemented by January 1, 2022.

With those changes, the lowest standardized risk weight would be 20 percent for single-family residential mortgage loans with LTVs at origination less than 50 percent. The 20 percent average risk weight would have been the same as the Basel framework's 20 percent minimum, notwithstanding the Enterprises having an average single-family original loan-to-value (OLTV) of approximately 77 percent as of September 30, 2019. These comparisons are complicated by the fact that the 20 percent average risk weight reflects capital relief for loan-level credit enhancement and MTMLTV. In particular, some meaningful portion of the gap between the credit risk capital requirements of the banking organizations and the Enterprises under the 2018 proposal is due to the 2018 proposal's use of MTMLTV instead of OLTV, as under the U.S. banking framework, to assign credit risk capital requirements for mortgage exposures. In a different house price environment, perhaps after several years of declining house prices, the mark-to-market framework could have resulted in higher credit risk capital requirements than the Basel and U.S. banking frameworks. Similarly, some of this gap might have been expected to narrow had real property prices moved toward their long-term trend. However, the sizing of the current gap under the 2018 proposal is still an important consideration informing the enhancements to the 2018 proposal. Notably, the 20 percent average risk weight would have been the same as the Basel framework's 20 percent risk weight assigned to exposures to sovereigns and central banks with ratings A+ to A− and claims on banks and corporates with ratings AAA to AA−.

The 20 percent average risk weight also would have been the same as the 20 percent risk weight assigned under the U.S. banking framework to Enterprise-guaranteed MBS.

This average risk weight equals the average post-CRT net credit risk capital requirement, excluding the going-concern buffer, under the 2018 proposal of approximately 164 basis points, divided by a total capital requirement of 800 basis points.

BCBS,

Basel III: Finalising Post-Crisis Reforms,

paragraph 64, at 21 (Dec. 2017), available at

https://www.bis.org/bcbs/publ/d424.pdf.

See

BCBS,

The Basel Framework,

paragraphs 20.4 and 20.14 (Dec. 15, 2019), available at

https://www.bis.org/basel_framework/index.htm?export=pdf.

•

Monoline businesses.

As discussed in the 2018 proposal, comparisons to the U.S. banking framework's capital requirements are complicated by the different risk profiles of the Enterprises and large banking organizations.

The Enterprises, for example, transfer much of the interest rate and funding risk on their mortgage exposures through their sales of their guaranteed MBS, while large banking organizations generally must fund those loans through customer deposits and other sources. While the interest rate and funding risk profiles are different, that difference should not

preclude comparisons of the

credit risk

capital requirements of the U.S. banking framework to the

credit risk

capital requirements of the Enterprises. The Basel and U.S. banking frameworks generally do not contemplate an explicit capital requirement for interest rate risk on banking book exposures, leaving interest rate risk capital requirements to bank-specific tailoring through the supervisory process.

If anything, the monoline nature of the Enterprises' mortgage-focused businesses actually suggests that the concentration risk of an Enterprise might be greater than that of a diversified banking organization with a similar amount of credit risk. FHFA has not attempted to make a specific adjustment to the risk-based capital requirements to mitigate the Enterprises' concentration risk, but the heightened risk associated with the Enterprises' sector-specific concentration is nonetheless an important consideration in determining the need for the enhancements contemplated by the proposed rule.

83 FR at 33323.

See

BCBS,

Interest Rate Risk in the Banking Book,

paragraph 1 (April 2016), available at

https://www.bis.org/bcbs/publ/d368.pdf

; (“Interest rate risk in the banking book (IRRBB) is part of the Basel capital framework's Pillar 2 (Supervisory Review Process) and subject to the Committee's guidance set out in the 2004 Principles for the management and supervision of interest rate risk (henceforth, the IRR Principles).”).

More generally, enhancements are necessary to mitigate certain risks and limitations associated with the underlying historical data and models used to calibrate the 2018 proposal's credit risk capital requirements. For example:

•

Limitations of crisis-era data.

Under the 2018 proposal, the credit risk capital requirement for a mortgage exposure was calibrated to be sufficient to absorb the lifetime unexpected losses incurred on loans of that type experiencing a shock to house prices similar to that observed during the 2008 financial crisis. As discussed in Section III.B, the Enterprises' financial crisis-era losses likely were mitigated to at least some extent by the unprecedented support by the federal government of the housing market and the economy, and also by the declining interest rate environment of the period. There is therefore some risk that the 2018 proposal's risk-based capital requirements, notwithstanding the required going-concern buffer, were not calibrated to ensure each Enterprise would be regarded as a viable going concern following an economic downturn that potentially entails more unexpected losses, whether because there is less or no Federal support of the economy, because there is less or no reduction in interest rates, or because of other causes. For example, post-crisis changes in federal, state, and local loss mitigation and other foreclosure requirements might increase the uncertainty as to loss estimations.

•

High-risk loan products.

A disproportionate share of the Enterprises' crisis-era credit losses (approximately $108 billion) arose from certain single-family mortgage exposures that are no longer eligible for acquisition by the Enterprises. The calibration of the 2018 proposal's credit risk capital requirements attributed a significant portion of the Enterprises' crisis-era losses to these product characteristics, including “Alt-A,” negative amortization, interest-only, and low or no documentation loans, as well as loans with debt-to-income ratio at origination greater than 50 percent, cash out refinances with total LTV greater than 85 percent, and investor loans with LTV greater than or equal to 90 percent. The statistical methods used to allocate losses between borrower-related risk attributes and product-related risk attributes pose significant model risk. To ensure safety and soundness, the capital requirements should mitigate the risk of potential underestimation of credit losses that would be incurred in an economic downturn with national housing price declines of similar magnitude, even absent those loan types and even assuming a repeat of Federal support of the economy and the declining interest rate environment.

Reliance on static look-up grids and multipliers might also introduce additional model risk as borrower behavior, mortgage products, underwriting practices, or the national housing markets continue to evolve.

•

Gaps in risk coverage.

There are some material risks to the Enterprises that were not assigned a risk-based capital requirement under either the 2018 proposal and the proposed rule—for example, risks relating to uninsured or underinsured losses from flooding, earthquakes, or other natural disasters or radiological or biological hazards. There also is no risk-based capital requirement for the risks that climate change could pose to property values in some localities.

Related to these capital adequacy concerns, the 2018 proposal's required capital was not tailored to the risk that a default or other financial distress of an Enterprise could have on the liquidity, efficiency, competitiveness, or resiliency of national housing finance markets. As described in Section VII.A.3, the absence of a stability capital buffer poses not only a risk to the national housing finance markets but also a risk to the safety and soundness of the Enterprises by perpetuating their funding advantages and undermining market discipline over their risk taking.

To address these and related concerns, and as described in more detail below, FHFA is proposing, among other changes:

• A prudential floor on the credit risk capital requirement for mortgage exposures to mitigate the model and other risks associated with the methodology for calibrating the credit risk capital requirements.

• A credit risk capital requirement on senior tranches of CRT held by an Enterprise, an adjustment to the CRT capital treatment to reflect that CRT is not equivalent in loss-absorbing capacity to equity financing, and operational criteria for CRT structures that together would mitigate the structuring, recourse, and other risks associated with these securitizations.

• Risk-based capital requirements for a number of exposures not expressly addressed by the 2018 proposal, including credit risk on commitments to acquire mortgage loans, counterparty risk on interest rate and other derivatives, and credit risk on an Enterprise's holdings or guarantees of the other Enterprise's MBS.

• A countercyclical adjustment for single-family credit risk that would result in greater capital retention when housing markets may be vulnerable to correction, while better enabling the Enterprises to play a countercyclical role.

• A stress capital buffer that would, among other things, enhance the resiliency of the Enterprises and ensure that each Enterprise would continue to be regarded as a viable going concern by creditors and other counterparties after a severe economic downturn.

• A stability capital buffer tailored to the risk that the 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 risk-based capital requirements that would prompt each Enterprise to develop its own view of credit and other risks and not rely solely on the risk assessments underlying the standardized risk weights assigned under this regulatory capital framework.

• A 2.5 percent leverage ratio and a 1.5 percent PLBA that would together serve as a credible backstop to the risk-based capital requirements and mitigate the inherent risks and limitations of any

methodology for calibrating those requirements.

C. Addressing Pro-Cyclicality

Consistent with many of the comments on the 2018 proposal, FHFA has determined that mitigating the pro-cyclicality of the 2018 proposal's risk-based capital requirements would facilitate capital management, enhance the safety and soundness of the Enterprises by preventing risk-based capital requirements from decreasing to unsafe and unsound levels, and help position the Enterprises to fulfill their statutory mission to provide stability and ongoing assistance to the national housing finance markets across the economic cycle. A pro-cyclical framework could have incentivized the Enterprises to expand credit when house prices increased, potentially left the Enterprises without regulatory capital that could be drawn down during a period of financial stress, and perhaps even exacerbated the housing price cycle itself. A pro-cyclical framework also could have led to large swings in required capital, leading to the practical necessity that prudent management would maintain a managerial capital surplus well above the capital requirements.

As described in more detail below, FHFA is proposing several enhancements to address this pro-cyclicality while preserving the mortgage risk-sensitive framework of the 2018 proposal. Among other changes, FHFA is proposing:

• A countercyclical adjustment to adjust each single-family mortgage exposure MTMLTV when national housing prices are 5.0 percent above or below the inflation-adjusted long-term trend.

• A stress capital buffer and a separate leverage buffer that will, in addition to enhancing the resiliency of the Enterprises, dampen pro-cyclicality by encouraging each Enterprise to retain capital during good times while remaining able to provide stability and ongoing assistance to the secondary mortgage market during a period of financial stress by utilizing capital buffers as losses are experienced.

• A prudential floor on the credit risk capital requirement for mortgage exposures that, in addition to mitigating the model and other risks associated with the methodology for calibrating the credit risk capital requirements, would also provide further stability to the risk-based capital requirements through the cycle.

• A requirement that each Enterprise maintain its own view of credit and other risks, including as to the relationship between housing prices and market fundamentals, by maintaining its own internal models for determining risk-based capital.

V. Definitions of Regulatory Capital

A. Statutory Definitions

As discussed in Sections VI.A and VI.B, the proposed rule would require each Enterprise to maintain required amounts of core capital and total capital, as defined in the Safety and Soundness Act.

Core capital means, with respect to an Enterprise, the sum of the following (as determined in accordance with GAAP):

• The par or stated value of outstanding common stock;

• The par or stated value of outstanding perpetual, noncumulative preferred stock;

• Paid-in capital; and

• Retained earnings.

Core capital does not include any amounts that the Enterprise could be required to pay, at the option of investors, to retire capital instruments.

Total capital means, with respect to an Enterprise, the sum of the following:

• The core capital of the Enterprise;

• A general allowance for foreclosure losses, which: (i) Includes an allowance for portfolio mortgage losses, an allowance for non-reimbursable foreclosure costs on government claims, and an allowance for liabilities reflected on the balance sheet for the Enterprise for estimated foreclosure losses on mortgage-backed securities; and (ii) does not include any reserves of the Enterprise made or held against specific assets; and

• Any other amounts from sources of funds available to absorb losses incurred by the Enterprise, that the Director by regulation determines are appropriate to include in determining total capital.

Notably, as discussed in Section IV.B.1, these statutory definitions do not include deductions and other adjustments for capital elements that might tend to have less loss-absorbing capacity during a period of financial stress (

e.g.,

DTAs, ALLL, goodwill, and intangibles). These statutory definitions also do not limit the extent to which preferred shares may satisfy the risk-based capital requirements.

B. Supplemental Definitions

1. Loss-Absorbing Capacity

Following HERA's amendments to the Safety and Soundness Act, FHFA has wide authority to prescribe regulatory capital requirements for the Enterprises. The Safety and Soundness Act generally authorizes FHFA to prescribe by regulation risk-based capital requirements for the Enterprises.

The Safety and Soundness Act also authorizes FHFA to prescribe minimum capital levels that are greater than the levels prescribed by statute.

The FHFA Director has general regulatory authority over the Enterprises, as well as the authority to issue regulations to carry out the duties of the FHFA Director.

The FHFA Director also may establish such other operational and management standards as the FHFA Director determines to be appropriate.

As amended by HERA, these and other provisions of the Safety and Soundness Act give the FHFA Director generally broad and flexible authority to tailor regulatory capital requirements for the Enterprises, including to prescribe additional capital requirements that supplement the statutory capital classifications based on total capital and core capital.

12 U.S.C. 4611.

12 U.S.C. 4612.

12 U.S.C. 4511, 4526.

12 U.S.C. 4513b.

FHFA is proposing to supplement the statutory definitions of total capital and core capital requirements with additional regulatory capital definitions based on the Basel framework's definitions of total capital, tier 1 capital, and CET1 capital. These supplemental definitions would include customary deductions and other adjustments for certain DTAs, goodwill, intangibles, and other assets that tend to have less loss-absorbing capacity during a financial stress. As discussed in Section IV.B.1, the supplemental definitions of regulatory capital would fill certain gaps in the statutory definitions of core capital and total capital. For example, neither core capital nor total capital adjust for AOCI, leaving open the possibility that an Enterprise could have positive total capital and core capital but yet be insolvent under GAAP. The supplemental tier 1 and CET1 capital requirements also would ensure that retained earnings and other high-quality capital are the predominant form of regulatory capital.

Because the supplemental definitions of regulatory capital in the proposed rule are adopted from the Basel framework, the supplemental definitions would be familiar to market participants. This familiarity should facilitate comparisons between the regulatory capital requirements of the Enterprises, banking organizations, and other market participants. The use of well-understood definitions of regulatory capital should also facilitate market discipline over the Enterprises' risk-taking by positioning future

shareholders, creditors, and other counterparties to more readily understand the regulatory capital that is available to absorb losses.

Consistent with the 2018 proposal, neither the statutory definitions nor the supplemental definitions of regulatory capital would include a measure of future guarantee fees or other future revenues. Counting future revenues toward capital requirements could be appropriate under a “claims-paying capacity” or similar framework that seeks only to ensure that an Enterprise has the ability to perform its guarantee and other financial obligations over time, perhaps subject to a stay or other pause in the payment of claims and other financial obligations during a resolution proceeding. The proposed rule instead seeks to ensure that each Enterprise is capitalized to remain a viable going concern both during and after a severe economic downturn, as discussed in Section III.B.2. Historical experience has established that credit, market, and operational losses can be incurred quickly during a stress, and it is an Enterprise's capacity to absorb those losses as incurred that defines creditors' and other counterparties' views as to whether the financial institution is a viable going concern. As discussed in Sections III.B.2 and III.B.3, market confidence in the Enterprises waned in mid-2008 when Fannie Mae and Freddie Mac had total capital of, respectively, $55.6 billion and $42.9 billion, notwithstanding their right to future guarantee fees.

FHFA's approach does, however, still give consideration to the loss-absorbing capacity of future guarantee fees or other revenues. As discussed in Section VII.A.1, FHFA has calibrated the stress capital buffer as the amount of regulatory capital sufficient for an Enterprise to withstand a severely adverse stress and still remain above the capital requirements.

Under this calibration methodology, the stress capital buffer has been sized based on net capital exhaustion in a severely adverse scenario. The determination of net capital exhaustion takes into account the guarantee fees and other revenues received during that stress.

See

BCBS,

Calibrating Regulatory Minimum Capital Requirements and Capital Buffers: A Top-down Approach,

paragraph I.A. (Oct. 2010) (“[T]he regulatory minimum requirement is the amount of capital needed for a bank to be regarded as a viable going concern by creditors and counterparties, while a buffer can be seen as an amount sufficient for the bank to withstand a significant downturn period and still remain above minimum regulatory levels.”), available at

https://www.bis.org/publ/bcbs180.pdf;

and Regulatory Capital Rules: Regulatory Capital, Enhanced Supplementary Leverage Ratio Standards for Certain Bank Holding Companies and Their Subsidiary Insured Depository Institutions, 78 FR 51101, 51105 (Aug. 20, 2013) (Joint Agency Proposed Rule) (“In calibrating the revised risk-based capital framework, the BCBS identified those elements of regulatory capital that would be available to absorb unexpected losses on a going-concern basis. The BCBS agreed that an appropriate regulatory minimum level for the risk-based capital requirements should force banking organizations to hold enough loss-absorbing capital to provide market participants a high level of confidence in their viability.”).

2. Components of Regulatory Capital

a. CET1 Capital

Consistent with the Basel and U.S. banking frameworks, CET1 capital would be the sum of an Enterprise's outstanding CET1 capital instruments that satisfy the criteria set forth below, related surplus (net of treasury stock), retained earnings, and AOCI, less regulatory adjustments and deductions.

The criteria for CET1 capital instruments are intended to ensure that CET1 capital instruments do not possess features that would cause an Enterprise's condition to further weaken during a period of financial stress. The CET1 capital instruments are any common stock instruments (plus any related surplus) issued by the Enterprise, net of treasury stock, that meet the criteria specified at § 1240.20(b)(1).

b. Additional Tier 1 Capital

Consistent with the Basel and U.S. banking frameworks, additional tier 1 capital would equal the sum of the additional tier 1 capital instruments that satisfy the criteria set forth at § 1240.20(c)(1) and related surplus, less applicable regulatory adjustments and deductions. The criteria are intended to ensure that additional tier 1 capital instruments would be available to absorb losses on a going-concern basis.

An Enterprise would not be permitted to include an instrument in its additional tier 1 capital unless FHFA has determined that the Enterprise has made appropriate provision, including in any resolution plan of the Enterprise, to ensure that the instrument would not pose a material impediment to the ability of an Enterprise to issue common stock instruments following any future appointment of FHFA as conservator or receiver under the Safety and Soundness Act.

c. Tier 2 Capital

Adjusted total capital would be the sum of CET1 capital, additional tier 1 capital, and tier 2 capital. Generally consistent with the Basel and U.S. banking frameworks, tier 2 capital would equal the sum of: Tier 2 capital instruments that satisfy the criteria set forth at § 1240.20(d)(1); related surplus; and limited amounts of excess credit reserves, less any applicable regulatory adjustments and deductions.

As under the U.S. banking framework for advanced approaches banking organizations, an Enterprise may include in tier 2 capital only the excess of its eligible credit reserves over its total expected credit loss, provided the amount does not exceed 0.6 percent of its credit risk-weighted assets. The limited inclusion of ALLL in tier 2 capital is a logical outgrowth of FHFA's calibration methodology for mortgage exposures under which the base risk weights and risk multipliers are intended to require credit risk capital sufficient to absorb the lifetime

unexpected

losses incurred on mortgage exposures experiencing a shock to house prices similar to that observed during the 2008 financial crisis. The same is also true for non-mortgage exposures, where FHFA generally has adopted the credit risk capital requirements of the U.S. banking framework, which also calibrates credit risk capital requirements to absorb unexpected losses.

An alternative approach perhaps could be to include general ALLL in adjusted total capital and then calibrate the credit risk capital requirements based on stress losses (

i.e.,

unexpected and expected losses). The resulting required loss-absorbing capacity for a mortgage exposure would be substantially the same. That approach however would raise safety and soundness risk relating to the loss-absorbing capacity of each Enterprise's ALLL in a period of financial stress, particularly if there is no limit on the share of total capital that may be ALLL. An approach that calibrates credit risk capital requirements based on stress losses also would limit FHFA's ability to rely on the credit risk capital requirements under the U.S. banking framework for non-mortgage exposures, an important consideration to the extent that FHFA does not have the data or models to calibrate its own credit risk capital requirements for non-mortgage exposures.

As with additional tier 1 capital, an Enterprise would not be permitted to include an instrument in its tier 2 capital unless FHFA has determined that the Enterprise has made appropriate provision, including in any resolution plan of the Enterprise, to ensure that the instrument would not pose a material impediment to the ability of an Enterprise to issue common stock instruments following any future appointment of FHFA as conservator or

receiver under the Safety and Soundness Act.

Question 1. Is each of the definitions of CET1 capital, tier 1 capital, and tier 2 capital appropriately formulated and tailored to the Enterprises?

Question 2. Should FHFA include additional amounts of an Enterprise's ALLL or excess credit reserves in any of the components of regulatory capital?

Question 3. Should any other capital elements qualify as CET1 capital, additional tier 1 capital, or tier 2 capital elements?

3. Regulatory Adjustments and Deductions

a. Deductions From CET1 Capital

Under the U.S. banking framework, goodwill and other intangible assets have long been either fully or partially excluded from regulatory capital because of the high level of uncertainty regarding the ability of a banking organization to realize value from these assets, especially under adverse financial conditions. The regulatory capital treatment of DTAs has posed particular safety and soundness risks for the Enterprises, as discussed in Section IV.B.1. The proposed rule would require an Enterprise to deduct from CET1 capital elements:

• Goodwill;

• Intangible assets other than mortgage-servicing assets (MSA) net of associated deferred tax liabilities (DTLs);

• DTAs that arise from net operating loss and tax credit carryforwards net of any related valuation allowances and net of DTLs in accordance with certain restrictions discussed under Section V.B.3.d; and

• Any defined benefit pension fund net asset, net of DTLs in accordance with certain DTL-related restrictions, and subject to certain exceptions with FHFA's approval.

An Enterprise also would deduct from CET1 capital any after-tax gain-on-sale associated with a securitization exposure. Gain-on-sale would be defined as an increase in the equity capital of an Enterprise resulting from a traditional securitization other than an increase in equity capital resulting from (i) the Enterprise's receipt of cash in connection with the securitization or (ii) reporting of a mortgage servicing asset.

Finally, an Enterprise also would deduct from CET1 capital the amount of expected credit loss that exceeds the Enterprise's eligible credit reserves. Eligible credit reserves would be defined as all general allowances that have been established through a charge against earnings to cover estimated credit losses associated with on- or off-balance sheet wholesale and retail exposures, including the ALLL associated with such exposures, but excluding other specific reserves created against recognized losses.

b. Adjustments to CET1 Capital

An Enterprise would subtract from CET1 capital any accumulated net gains and add any accumulated net losses on cash-flow hedges included in AOCI that relate to the hedging of items that are not recognized at fair value on the balance sheet. This adjustment would remove an element that gives rise to artificial volatility in CET1 capital as it would avoid a situation in which the changes in the fair value of the cash-flow hedge are reflected in regulatory capital but the changes in the fair value of the hedged item is not.

An Enterprise also would be required to deduct any net gain and add any net loss related to changes in the fair value of liabilities that are due to changes in the Enterprise's own credit risk. An Enterprise must deduct the difference between its credit spread premium and the risk-free rate for derivatives that are liabilities as part of this adjustment.

To avoid the double-counting of regulatory capital, an Enterprise would deduct the amount of its investments in its own capital instruments, including direct and indirect exposures, to the extent such instruments are not already excluded from regulatory capital. Specifically, an Enterprise would deduct its investment in its own CET1, additional tier 1, and tier 2 capital instruments from the sum of its CET1, additional tier 1, and tier 2 capital, respectively. In addition, any CET1, additional tier 1, or tier 2 capital instrument issued by an Enterprise that the Enterprise could be contractually obligated to purchase also would be deducted from CET1, additional tier 1, or tier 2 capital elements, respectively.

c. Items Subject to the 10 and 15 Percent CET1 Capital Threshold Deductions

An Enterprise would deduct from its CET1 capital the amount of each of the following items that individually exceeds the 10 percent CET1 capital deduction threshold described below:

• DTAs arising from temporary differences that could not be realized through net operating loss carrybacks (net of any related valuation allowances and net of DTLs in accordance with certain restrictions discussed under Section V.B.3.d); and

• MSAs, net of associated DTLs in accordance with certain restrictions discussed under Section V.B.3.d.

An Enterprise would calculate the 10 percent CET1 capital deduction threshold by taking 10 percent of the sum of an Enterprise's CET1 elements, less the adjustments to, and deductions from, CET1 capital discussed above.

The aggregate amount of the items subject to the threshold deductions that are not deducted as a result of the 10 percent CET1 capital deduction threshold must not exceed 15 percent of an Enterprise's CET1 capital, as calculated after applying all regulatory adjustments and deductions required under the proposed rule (the 15 percent CET1 capital deduction threshold). That is, an Enterprise would deduct in full the amounts of the items subject to the threshold deductions on a combined basis that exceed 17.65 percent (the proportion of 15 percent to 85 percent) of CET1 capital, less all regulatory adjustments and deductions required for the calculation of the 10 percent CET1 capital deduction threshold mentioned above, and less the items subject to the 10 and 15 percent deduction thresholds.

d. Netting of Deferred Tax Liabilities Against Deferred Tax Assets and Other Deductible Assets

An Enterprise would be permitted to net DTLs against assets (other than DTAs) subject to deduction under the proposed rule, provided the DTL is associated with the asset and the DTL would be extinguished if the associated asset becomes impaired or is derecognized under GAAP. An Enterprise would be prohibited from using the same DTL more than once for netting purposes.

With respect to the netting of DTLs against DTAs, the amount of DTAs that arise from net operating loss and tax credit carryforwards, net of any related valuation allowances, and the amount of DTAs arising from temporary differences that the Enterprise could not realize through net operating loss carrybacks, net of any related valuation allowances, could be netted against DTLs if certain conditions are met.

VI. Capital Requirements

A. Risk-Based Capital Requirements

1. Supplemental Requirements

FHFA is proposing to require the Enterprises to maintain the following risk-based capital:

• Total capital not less than 8.0 percent of risk-weighted assets;

• Adjusted total capital not less than 8.0 percent of risk-weighted assets;

• Tier 1 capital not less than 6.0 percent of risk-weighted assets; and

• CET1 capital not less than 4.5 percent of risk-weighted assets.

As discussed in Section III.B.3, a lesson of the 2008 financial crisis is that the Enterprises' safety and soundness depends not only on the quantity but also on the quality of their capital. To that end, FHFA is proposing to supplement the risk-based capital requirement based on statutorily defined total capital with additional risk-based capital requirements based on the Basel framework's definitions of total capital, tier 1 capital, and CET1 capital.

As discussed in Section IV.B.1, FHFA noted in the 2018 proposal that the Enterprises' DTAs, which are included in total capital and core capital by statute, “may provide minimal to no loss-absorbing capability during a period of [financial] stress as recoverability (via taxable income) may become uncertain.”

e.g.,

ALLL, goodwill, and intangibles), although FHFA did request comment on how best to compensate for the loss-absorbing deficiencies of ALLL and preferred stock within the framework of the 2018 proposal. The 2018 proposal also requested comment on, but did not adjust for, AOCI, leaving open the possibility that an Enterprise could have positive total capital and core capital despite being insolvent under GAAP. The supplemental risk-based capital requirements for adjusted total capital, tier 1 capital, and CET1 capital would address these safety and soundness issues to the extent, as discussed in Section V.B, the underlying regulatory capital definitions incorporate deductions and other adjustments for those capital elements that tend to have less loss-absorbing capacity.

83 FR at 33388.

Related to this, one of the lessons of the 2008 financial crisis is that retained earnings and other high-quality capital should be the predominant form of regulatory capital. In addition to not limiting the extent to which general ALLL counted toward regulatory capital, the 2018 proposal did not limit the extent to which preferred shares could satisfy the risk-based capital requirements, although FHFA did solicit comment on these issues. Specifically, there was neither a risk-based capital requirement for core capital nor a requirement that retained earnings and other common equity be the predominant form of capital. The risk-based capital requirements for tier 1 capital and CET1 capital would address this safety and soundness issue in a way that should be familiar to market participants.

2. Risk-Weighted Assets

An Enterprise would determine its risk-weighted assets under two approaches—a standardized approach and an advanced approach—with the greater of the two used to determine its risk-based capital requirements. Under both approaches, an Enterprise's risk-weighted assets would equal the sum of its credit risk-weighted assets, market risk-weighted assets, and operational risk-weighted assets.

Specifying each of the aggregate risk-based capital requirements as a percent of risk-weighted assets is a change from the 2018 proposal, but the change itself would not impact the quantity of required total capital. Both under the 2018 proposal and the proposed rule, and consistent with the Basel and U.S. banking frameworks,

the risk-based capital requirements should be calibrated to require each Enterprise to hold enough loss-absorbing capital to maintain the confidence of creditors and other counterparties in its viability as a going concern. More specifically, FHFA calibrated the credit risk capital requirements for mortgage exposures to require capital sufficient to absorb the lifetime unexpected losses incurred on exposures experiencing a shock to house prices similar to that observed during the 2008 financial crisis, as discussed in Sections VIII.A.2 and VIII.B.2. The base risk weight for a mortgage exposure is equal to the adjusted total capital requirement for the exposure expressed in basis points and divided by 800, which is the 8.0 percent adjusted total capital requirement also expressed in basis points. Expressing the risk-based capital requirement for an exposure as a risk weight, or the aggregate risk-based capital requirement as a percent of risk-weighted assets, is simply a matter of terminology.

Although the shift to a terminology of risk-weighted assets is more form than substance, FHFA has made this change for at least two reasons. First, the addition of three new risk-based capital requirements raises the need for a straightforward mechanism to specify the aggregate regulatory capital required for each. Risk-weighted assets accomplishes this by offering a common denominator across the 2018 proposal's risk-based total capital requirement and the supplemental risked-based capital requirements contemplated by the proposed rule. Second, this approach and its associated terminology are well-understood by those familiar with the U.S. banking framework. Expressing the risk-based capital requirement for an exposure as a risk-weight will facilitate transparency and comparability with the U.S. banking framework and other regulatory capital frameworks. Because these concepts are well-understood, this approach also should facilitate market discipline over each Enterprise's risk-taking by its creditors and other counterparties.

B. Leverage Ratio Requirements

1. Adjusted Total Assets

Each Enterprise would be required to maintain capital sufficient to satisfy the following leverage ratio requirements:

• Core capital not less than 2.5 percent of adjusted total assets; and

• Tier 1 capital not less than 2.5 percent of adjusted total assets.

Adjusted total assets would be defined as total assets under GAAP, with adjustments to include many of the off-balance sheet and other exposures that are included in the supplemental leverage ratio requirements of the U.S. banking framework.

2. Tier 1 Leverage Ratio Requirement

As with the risk-based capital requirements, and as discussed in Section IV.B.1, the proposed rule would supplement the core capital leverage ratio requirement with a leverage ratio requirement based on a definition of regulatory capital, here tier 1 capital, that has deductions and other adjustments for capital elements that tend to have less loss-absorbing capacity during a period of financial stress. Tier 1 capital is also a well-understood concept for market participants familiar with the U.S. banking framework. That in turn would facilitate transparency and comparability with the leverage ratio requirements for U.S. banking organizations, as well as market discipline by the Enterprises' creditors and other counterparties.

3. Sizing of the Requirements

The primary purpose of the leverage ratio requirements is to provide a credible, non-risk-based backstop to the risk-based capital requirements to safeguard against model risk and

measurement error with a simple, transparent, independent measure of risk. From a safety-and-soundness perspective, each type of requirement offsets potential weaknesses of the other, and well-calibrated risk-based capital requirements working with a credible leverage ratio requirement are more effective than either type would be in isolation. The leverage ratio requirements would have the added benefit of dampening some of the pro-cyclicality inherent in the aggregate risk-based capital requirements. The core capital leverage ratio requirement also would replace the current statutory leverage ratio requirement for purposes of the corrective action provisions of the Safety and Soundness Act.

FHFA has sized the leverage ratio requirements to be a credible backstop to the risk-based capital requirements, taking into account the analogous leverage ratio requirements of U.S. banking organizations and the Federal Home Loan Banks, considerations relating to the Enterprises' historical loss experiences, and the model and related risks posed by the calibration of the risk-based capital requirements.

First, the proposed leverage ratio requirements are generally aligned with the analogous leverage ratio requirements of U.S. banking organizations and the Federal Home Loan Banks. The U.S. banking framework's leverage ratio requirement requires banking organizations maintain tier 1 capital no less than 4.0 percent of total assets. Insured depository institutions subsidiaries of certain large U.S. bank holding companies also must maintain tier 1 capital no less than 6.0 percent of total assets to be “well capitalized.”

Using data for the 18 bank holding companies subject to the Federal Reserve Board's supervisory stress testing program in 2018, FHFA determined that the average risk weight on the assets of these banks was 61 percent in the fourth quarter of 2018. Under the U.S. banking framework, the Enterprises' mortgage assets generally would be assigned a 50 percent risk weight under the standardized approach. This suggests that the average risk weight on the assets of the Enterprises would have been approximately 81 percent (50 percent divided by 61 percent) of that of these large bank holding companies. That in turn implies a risk-adjusted analogous leverage ratio requirement for the Enterprises of 3.3 percent (81 percent of the 4.0 percent leverage ratio requirement for U.S. banking organizations).

See, e.g.,

12 CFR 6.4(b)(1)(i)(D).

That U.S. banking framework's 3 percent supplemental leverage ratio requirement is an inappropriate comparable for sizing the Enterprises' leverage ratio requirements. Approximately 95 percent of the Enterprises' adjusted total assets are GAAP total assets that are subject to the U.S. banking framework's 4 percent leverage ratio requirement. The primary exception is off-balance sheet guarantees on loans and securities, principally Freddie Mac's K-deals, but these amounts are small relative to the Enterprises' total assets under GAAP.

While the interest rate and funding risks of the Enterprises and U.S. banking organizations are different, the Basel and U.S. banking frameworks generally do not contemplate an explicit capital requirement for interest rate risk on banking book exposures given the absence of a consensus as to how to quantify that capital requirement, instead leaving interest rate risk capital requirements to bank-specific tailoring through the supervisory process.

The differences in the interest rate and funding risk profiles therefore should not preclude comparisons to the U.S. banking framework's leverage ratio requirements, subject to adjustments for the different credit risk profiles of the Enterprises and U.S. banking organizations (as described above). Further, the monoline nature of the Enterprises' mortgage-focused businesses suggests that the concentration risk of an Enterprise is greater than that of a diversified banking organization with a similar amount of mortgage credit risk, perhaps meriting a higher leverage ratio requirement, all else equal.

See

BCBS,

Interest Rate Risk in the Banking Book,

paragraph 1, (April 2016), available at

https://www.bis.org/bcbs/publ/d368.pdf;

(“Interest rate risk in the banking book (IRRBB) is part of the Basel capital framework's Pillar 2 (Supervisory Review Process) and subject to the Committee's guidance set out in the 2004 Principles for the management and supervision of interest rate risk (henceforth, the IRR Principles).”).

The Federal Home Loan Banks also must maintain total capital no less than 4.0 percent of total assets. That 4.0 percent leverage ratio requirement should be considered in the context of the safety and soundness benefits of the statutory requirement that each Federal Home Loan Bank advance be fully secured. Related to that, the safety and soundness benefits of that collateral might be furthered by law, as any security interest granted to a Federal Home Loan Bank by a member (or affiliate of a member) is, with some exceptions, entitled by statute to priority over the claims and rights of any other party, including any receiver, conservator, trustee, or similar party having rights of a lien creditor.

Second, the proposed leverage ratio requirements are broadly consistent with the Enterprises' historical loss experiences. As discussed in Sections II.D.3 and III.B.1, the Enterprises' crisis-era cumulative capital losses peaked at the end of 2011 at $265 billion, approximately 4.8 percent of their adjusted total assets as of December 31, 2007. Setting aside the valuation allowances on their DTAs, which are subject to deductions and other adjustments to CET1 capital (and therefore tier 1 and adjusted total capital) under the proposed rule, the Enterprises' crisis-era peak cumulative capital losses were $167 billion, approximately 3.0 percent of their total assets as of December 31, 2007. Notably even these DTA-adjusted capital losses exceeded by $36 billion the tier 1 capital that would have been required under the 2.5 percent leverage ratio requirement as of December 31, 2007.

FHFA recognizes that a portion of the crisis-era losses arose from single-family loans that are no longer eligible for acquisition by the Enterprises. However, the sizing of regulatory capital requirements must take into account the modeling risk posed by the attribution of such losses to specific product characteristics, as discussed in Section IV.B.2. The sizing of the regulatory capital requirements also must guard against potential future relaxation of underwriting standards and regulatory oversight over those underwriting standards.

The Enterprises' historical loss experiences actually might tend to understate the regulatory capital that would be necessary to remain a viable going concern to creditors and other counterparties. As discussed in Section III.B.1, the Enterprises' crisis-era losses likely were mitigated to at least some extent by the unprecedented support by the federal government of the housing market and the economy and also by the declining interest rate environment of the period. The calibration of the leverage ratio requirement and other required capital requirements cannot assume a repeat of those loss mitigants. Also, as discussed in Section IV.B.2, there are some material risks to the Enterprises that are not assigned a risk-based capital requirement—for example, risks relating to uninsured or underinsured losses from flooding, earthquakes, or other natural disasters or radiological or biological hazards. There also is no risk-based capital requirement for the risks that climate change could pose to property values in some localities.

Third, certain risks and limitations associated with the underlying

historical data and models used to calibrate the credit risk capital requirements reinforce the importance of leverage ratio requirements that safeguard against model risk and measurement error. There is inevitably a trade-off between, on the one hand, preserving the mortgage risk-sensitive framework of the 2018 proposal and, on the other hand, managing the model and related risks associated with any methodology for developing a granular assessment of credit risk specific to different mortgage loan categories. As discussed in Section IV.B.2, a disproportionate share of the Enterprises' crisis-era losses arose from certain single-family mortgage exposures that are no longer eligible for acquisition by the Enterprises. The calibration of the credit risk capital requirements attributed a significant portion of the Enterprises' crisis-era losses (approximately $108 billion) to these products. The statistical methods used to allocate losses between borrower-related risk attributes and product-related risk attributes pose significant model risk. It is possible that the calibration understates the credit losses that would be incurred in an economic downturn with national housing price declines of similar magnitude, even assuming a repeat of crisis-era Federal support of the economy and the declining interest rate environment. To this point, as discussed in Section VIII.A.7, had the proposed rule been in effect on December 31, 2007, the credit risk capital requirements still would not have been sufficient to absorb the projected lifetime credit losses on Freddie Mac's single-family book. Under a dynamic framework, the aggregate credit risk capital requirements would have increased in subsequent years as losses were incurred, while there also would have been material uncertainty as to an Enterprise's ability to raise sufficient quantities of new capital during a period of financial stress and significant losses.

The risk-based capital requirements should, as a general rule, exceed the regulatory capital required under the leverage ratio requirements. At the same time, if the tier 1 leverage ratio requirement is to be an independently meaningful and credible backstop, there will inevitably be some exceptions in which the tier 1 leverage ratio requirement requires more regulatory capital than the risk-based capital requirements. In FHFA's view, the measurement period of September 30, 2019 is, in fact, consistent with the circumstances under which a credible leverage ratio would be binding, given the exceptional single-family house price appreciation since 2012, the strong credit performance of both single-family and multifamily mortgage exposures, the significant progress by the Enterprises to materially reduce legacy exposure to NPLs and re-performing loans, robust CRT market access enabling substantial risk transfer, and the generally strong condition of key counterparties, such as mortgage insurers.

Question 4. Is the tier 1 leverage ratio requirement appropriately sized to serve as a credible backstop to the risk-based capital requirements?

Question 5. Should the Enterprise's leverage ratio requirements be based on total assets, as defined by GAAP, the Enterprise's adjusted total assets, or some other basis?

C. Enforcement

FHFA may draw upon several authorities to address potential Enterprise failures to meet the proposed rule's capital requirements set forth in VI.A and VI.B. A failure to maintain regulatory capital in excess of each of these capital requirements may result in one or more enforcement consequences. In all cases, the FHFA Director retains the authority to determine the appropriate enforcement consequence.

The Safety and Soundness Act authorizes FHFA to establish capital levels for an Enterprise by regulation.

An Enterprise failure to meet a capital threshold that is required by regulation may be addressed through enforcement mechanisms for regulatory violations including procedures for cease and desist and consent orders.

Through a cease and desist or consent order, FHFA could require an Enterprise to develop and implement a capital restoration plan, restrict asset growth or activities, and take other appropriate action to remediate the violation of law.

12 U.S.C. 4526, 4611, 4612(c).

12 U.S.C. 4581, 12 CFR part 1209.

FHFA may also use the enforcement tools available under its authority to prescribe and enforce prudential management and operations standards (PMOS).

The proposed rule, other than the PCCBA, the PLBA, and the associated payout restrictions, would be prescribed as a PMOS guideline that may be enforced under these PMOS authorities. The PMOS statute and rule include enforcement remedies similar, although not identical, to those under the Prompt Corrective Action (PCA) framework discussed below, focusing on a remediation plan and such other measures as the Director deems appropriate, but not conservatorship or receivership. The FHFA Director may require as part of a remediation plan (which is to be developed within a timeline in the PMOS regulation) restrictions on capital distributions, restrictions on asset growth, activities, and acquisitions, a requirement for new capital-raising, and other restrictions as appropriate.

12 U.S.C. 4513b; 12 CFR part 1236.

The PCA framework set out in the Safety and Soundness Act

also provides for enforcement tools when a shortfall occurs in capital requirements that are set forth in the statute, using the statute's prescribed capital concepts. The PCA establishes four capital categories with associated increasingly severe enforcement tools: “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” Under the PCA framework, the principal remedial tool is a recapitalization plan, and other tools include restrictions on capital distributions and asset growth, prior approval of acquisitions and new activities, improvement of management, and restriction on compensation. In serious enough conditions, such as critical undercapitalization, the PCA provides that an Enterprise can be placed in conservatorship or receivership. In addition, the PCA provisions provide for an Enterprise to be downgraded if alternative specified conditions are met. One of those conditions is that an Enterprise is in “an unsafe or unsound condition,” as determined by FHFA after notice and opportunity for a hearing.

12 U.S.C. 4614

et seq.

The proposed rule would include a leverage requirement and a risk-based capital requirement using the concepts of total capital and core capital as defined in the Safety and Soundness Act. The PCA enforcement framework applies to an Enterprise's failure to meet either of these statutorily based capital requirements. In addition, FHFA could enforce the core capital and total capital requirements under its authority to issue an order to cease and desist from a violation of law or under its PMOS authority.

FHFA recognizes that there may be very particular economic circumstances during which an Enterprise may meet its risk-based capital requirement to maintain total capital in excess of 8.0 percent of risk-weighted assets, but fails to meet the leverage ratio requirement of core capital in excess of 2.5 percent of adjusted total assets. This situation falls outside of the PCA capital classifications and enforcement

framework, but FHFA could address a shortfall through its PMOS or other regulatory enforcement authorities. If appropriate to provide greater clarity to the Enterprises and other market participants, FHFA may issue supervisory guidance regarding progressive application of its enforcement authorities as the capital position of an Enterprise declines.

Question 6. Should FHFA consider any changes to its contemplated enforcement framework? What supervisory guidance would be helpful to promote market understanding of how FHFA expects to apply its enforcement authorities?

Question 7. Should any of the risk-based capital requirements or leverage ratio requirements be phased-in over a transition period?

Question 8. Alternatively, should the enforcement of the risk-based capital requirements during the implementation of a capital restoration plan be tailored through a consent order or other similar regulatory arrangement, and if so how?

VII. Capital Buffers

A. Prescribed Capital Conservation Buffer Amount (PCCBA)

FHFA is proposing to supplement certain of the risk-based capital requirements with a PCCBA. To avoid limits on capital distributions and discretionary bonus payments, an Enterprise would have to maintain regulatory capital that exceeds each of its adjusted total capital, tier 1 capital, and CET1 capital requirements by at least the amount of its PCCBA. That PCCBA would consist of three separate component buffers—a stress capital buffer, a countercyclical capital buffer, and a stability capital buffer.

The PCCBA would be determined as a percent of an Enterprise's adjusted total assets.

Fixing the PCCBA at a specified percent of an Enterprise's adjusted total assets, instead of risk-weighted assets, is a notable departure from the Basel framework. FHFA intends a fixed-percent PCCBA, among other things, to reduce the impact that the PCCBA potentially could have on higher risk exposures, avoid amplifying the secondary effects of any model or similar risks inherent to the calibration of granular risk weights for single-family and multifamily mortgage exposures, and further mitigate the pro-cyclicality of the aggregate risk-based capital requirements.

The stress capital buffer and the countercyclical capital buffer amount could vary, which would then result in a change in the Enterprise's PCCBA when expressed as a percent of the Enterprise's adjusted total assets.

1. Stress Capital Buffer

An Enterprise's stress capital buffer would equal 0.75 percent of the Enterprise's adjusted total assets. The proposed stress capital buffer is similar in amount and rationale to the 0.75 percent going-concern buffer contemplated by the 2018 proposal. The 2018 proposal acknowledged that each Enterprise is required by charter to provide stability and ongoing assistance to the secondary mortgage market during and after a period of severe financial stress. The 2018 proposal also observed that “[r]aising new capital during a period of severe housing market stress . . . would be very expensive, if not impossible; therefore, the [2018 proposal] would require the Enterprises to hold additional capital on an on-going basis (`going-concern buffer') in order to continue purchasing exposures and to maintain market confidence during a period of severe distress.”

An important difference is that the 2018 proposal's going-concern buffer would have been a component of the risk-based capital requirement, such that failure to maintain the regulatory capital required by the going-concern buffer could have triggered significant regulatory sanctions. In contrast, the proposed rule converts the 2018 proposal's going-concern buffer into a component of the capital conservation buffer that FHFA intends to be available for an Enterprise to draw down during a period of financial stress. As discussed in Section II.D, the potential for less punitive sanctions for drawing down the capital conservation buffer should position each Enterprise to play a countercyclical role in the market, and would have the further benefit of reducing the managerial capital cushion that an Enterprise might be expected to maintain above the regulatory capital requirements.

For the reasons given in Section III.B.2, and as contemplated for banking organizations by the Basel and U.S. banking frameworks,

each Enterprise should be capitalized to remain a viable going concern both during and after a severe economic downturn. While the proposed regulatory capital requirements are sized to ensure an Enterprise would be regarded as a viable going concern by creditors and other counterparties, the stress capital buffer is sized to ensure that the Enterprise would, in ordinary times, maintain regulatory capital that could be drawn down during a financial stress and still be regarded as a viable going concern after that stress.

78 FR at 51105 (“In calibrating the revised risk-based capital framework, the BCBS identified those elements of regulatory capital that would be available to absorb unexpected losses on a going-concern basis. The BCBS agreed that an appropriate regulatory minimum level for the risk-based capital requirements should force banking organizations to hold enough loss-absorbing capital to provide market participants a high level of confidence in their viability. The BCBS also determined that a buffer above the minimum risk-based capital requirements would enhance stability, and that such a buffer should be calibrated to allow banking organizations to absorb a severe level of loss, while still remaining above the regulatory minimum requirements.”).

To a similar end, FHFA sized the 2018 proposal's going-concern buffer based on the Enterprises' Dodd Frank Act Stress Test (DFAST) results for the severely adverse scenario. Specifically, “FHFA calculated the amount of capital necessary for the Enterprises to meet a 2.5 percent leverage requirement at the end of each quarter of the simulation of the severely adverse DFAST scenario (without DTA valuation allowance) and compared that amount to the aggregate risk-based capital requirement. The difference between these two measures provided an indicator for the size of the going-concern buffer.”

As further validation of the sizing of the stress capital buffer, FHFA's 2018 proposal compared the regulatory capital obtained by applying the going-concern buffer to the 2017 single-family book of business with the regulatory capital required to fund each Enterprise's 2017 new acquisitions. FHFA found the proposed going-concern buffer would provide sufficient capital for each Enterprise to fund an additional one to two years of new acquisitions comparable to their 2017 new acquisitions. FHFA continues to believe that 2018 proposal's approach provides a strong indicator for the appropriate size of the stress capital buffer that replaces the going-concern buffer.

FHFA has also looked to the sizing of analogous buffers under the Basel and U.S. banking frameworks. As recently amended by the Federal Reserve Board, the U.S. banking framework requires each U.S. banking organization to maintain a stress capital buffer that exceeds its regulatory capital requirements by at least 2.5 percent of its risk-weighted assets, potentially more depending on its peak cumulative capital exhaustion under its supervisory stress test. Under the current average risk weight for the Enterprises' exposures of 28 percent, the proposed stress capital buffer is equivalent to 2.68

percent of the Enterprises' risk-weighted assets.

While the proposed rule contemplates a stress capital buffer sized as a fixed- percent of an Enterprise's adjusted total assets, FHFA is also seeking comment on an alternative under which FHFA would implement an approach similar to that of the Federal Reserve Board and periodically re-size the stress capital buffer to the extent that FHFA's eventual program for supervisory stress tests determines that an Enterprise's peak capital exhaustion under a severely adverse stress would exceed 0.75 percent of adjusted total assets. Under this approach, the stress capital buffer would still be determined as a percent of adjusted total assets, not risk-weighted assets. A dynamically re-sized stress capital buffer would be more risk-sensitive than a fixed-percent stress capital buffer, varying in amount across the economic cycle and also varying with the riskiness of the Enterprise's mortgage exposures. An approach that leverages a supervisory stress test could also incorporate assumptions as to the continued availability of CRT during a period of financial stress.

Related to this, FHFA's proposal to incorporate into each Enterprise's PCCBA a stress capital buffer should not be construed to imply or otherwise suggest that a similar buffer would necessarily be appropriate for other market participants in the housing finance system. Some of the Enterprises' counterparties, and some other market participants in the housing finance system, need not necessarily be capitalized to remain a viable going concern both during and after a severe economic downturn. For these market participants, calibrating capital adequacy based on “claims paying capacity” or an insurance-like or similar standard might be appropriate in light of their size and role in the housing finance system.

Question 9. Is the stress capital buffer appropriately formulated and calibrated?

Question 10. Should an Enterprise's stress capital buffer be periodically re-sized to the extent that FHFA's eventual program for supervisory stress tests determines that an Enterprise's peak capital exhaustion under a severely adverse stress would exceed 0.75 percent of adjusted total assets?

Question 11. Should an Enterprise's stress capital buffer be adjusted as the average risk weight of its mortgage exposures and other exposures changes?

Question 12. Should an Enterprise's stress capital buffer be based on the Enterprise's adjusted total assets or risk-weighted assets?

2. Countercyclical Capital Buffer

The U.S. banking regulators adopted a countercyclical capital buffer for certain large U.S. banking organizations in June 2013, which has been and remains set at 0 percent of risk-weighted assets. The countercyclical capital buffer aims to ensure that banking sector capital requirements take into account the macro-financial environment in which banks operate.

The buffer is to be deployed when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk to ensure the banking system has a buffer of capital to protect it against future potential losses. This focus on excess aggregate credit growth means that the buffer is likely to be deployed on an infrequent basis.

BCBS,

Basel: A Global Regulatory Framework for More Resilient Banks and Banking Systems,

paragraph 137 (Dec. 2010; revised June 2011), available at

http://www.bis.org/publ/bcbs189.htm.

As is currently the case under the U.S. banking framework, the countercyclical capital buffer for the Enterprises would initially be set at 0 percent of adjusted total assets. FHFA does not expect to adjust this buffer in the place of, or to supplement, the countercyclical adjustment to the risk-based capital requirements for single-family mortgage exposures discussed in Section VIII.A.4. Instead, as under the Basel and U.S. banking frameworks, FHFA would adjust the countercyclical capital buffer taking into account the macro-financial environment in which the Enterprises operate, such that it would be deployed only when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk. This focus on excess aggregate credit growth means the countercyclical buffer likely would be deployed on an infrequent basis, and generally only when similar buffers are deployed by the U.S. banking regulators. Any adjustment to the countercyclical capital buffer would be made in accordance with applicable law and after appropriate notice to the Enterprises.

Question 13. Is the countercyclical capital buffer appropriately formulated?

Question 14. What administrative or other process should govern FHFA's adjustments to the countercyclical capital buffer?

Question 15. Should FHFA more explicitly base its determination to adjust the countercyclical capital buffer to the determination of the U.S. banking regulators to adjust their similar buffer?

3. Stability Capital Buffer

a. Comments on the 2018 Proposal

FHFA received several comment letters on the 2018 proposal that argued that FHFA did not adequately address the risk posed by the size and importance of the Enterprises, particularly in light of the fact that during the 2008 financial crisis, the Enterprises proved to be “too-big-to-fail.” Multiple commenters recommended FHFA consider adding a capital buffer due to the size of the Enterprises' footprints. Other commenters suggested FHFA address the Enterprises' size and importance in different ways, such as through the leverage ratio, through the credit risk capital grids, or with an asset-level surcharge that differed by the riskiness of the activity.

b. U.S. Banking Framework

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) mandates that the Federal Reserve Board adopt, among other prudential measures, enhanced capital standards to mitigate the risk posed to financial stability by systemically important financial institutions. The Federal Reserve Board has implemented a number of measures designed to strengthen firms' capital positions in a manner consistent with the Dodd-Frank Act's requirement that such measures increase in stringency based on the systemic importance of the firm.

The Federal Reserve Board has also finalized capital surcharges for the U.S. banking organizations of the greatest systemic importance that have been deemed global systemically important bank holding companies (GSIBs). These GSIB capital surcharges are calibrated based on the Federal Reserve Board's measures of each GSIB's systemic footprint under an “expected impact” framework that considers the harm that the GSIB's failure would cause to the financial system as adjusted by the likelihood that the GSIB will fail. Because the failure of a GSIB might undermine financial stability and thus cause greater negative externalities than might the failure of a firm that is not a GSIB, a probability of default that would be acceptable for a non-GSIB might be unacceptably high for a GSIB. Lowering the probability of a GSIB's default reduces the risk to financial stability. The most straightforward means of lowering the probability of a GSIB's default is to require it to hold more regulatory capital relative to its risk-weighted assets than non-GSIBs are required to hold.

c. Rationale and Sizing

As discussed in Section III.B.4, the lessons of the 2008 financial crisis have established that the failure of an Enterprise could do significant harm to the national housing finance markets, as well as the U.S. economy more generally. The Enterprises remain the dominant participants in the housing finance system, owning or guaranteeing 44 percent of residential mortgage debt outstanding as of September 30, 2019. The Enterprises also continue to control critical infrastructure for securitizing and administering $5.5 trillion of single-family and multifamily MBS. The Enterprises' imprudent risk-taking and inadequate capitalization led to their near collapse and were among the proximate causes of the 2008 financial crisis. The precipitous financial decline of the Enterprises was also among the most destabilizing events of the 2008 financial crisis, leading to their taxpayer-backed rescue in September 2008. Even today, a perception continues to persist that the Enterprises are “too big to fail.” This perception reduces the incentives of creditors and other counterparties to discipline risk-taking by the Enterprises. This perception also produces competitive distortions to the extent that the Enterprises can fund themselves at a lower cost than other market participants.

Pursuant to the Safety and Soundness Act, as amended by HERA, the FHFA Director's principal duties are, among other duties, to ensure that each Enterprise operates in a safe and sound manner and that the operations and activities of each Enterprise foster liquid, efficient, competitive, and resilient national housing finance markets.

For the reasons below, FHFA is proposing to incorporate into each Enterprise's PCCBA an Enterprise-specific stability capital buffer that is tailored to the risk that the Enterprise's default or other financial distress could have on the liquidity, efficiency, competitiveness, or resiliency of the national housing finance markets (housing finance market stability risk).

12 U.S.C. 4513(a)(1).

FHFA's proposed stability capital buffer should not be construed to imply or otherwise suggest that a similar capital surcharge would necessarily be appropriate for the Enterprises' counterparties or other market participants in the housing finance system. Some of these market participants do not pose much, if any, risk to the liquidity, efficiency, competitiveness, or resiliency of national housing finance markets.

First, an Enterprise-specific stability capital buffer would foster liquid, efficient, competitive, and resilient national housing finance markets by reducing the expected impact of the Enterprise's failure on the national housing finance markets. Under a regulatory capital framework in which each Enterprise is subject to the same capital requirements and has the same probability of default, a larger Enterprise's default would nonetheless still pose a greater expected impact due to the greater magnitude of the effects of its default on the national housing finance markets. As a result, a probability of default that might be acceptable for a smaller Enterprise might be unacceptably high for a larger Enterprise. By subjecting a larger Enterprise to a larger capital surcharge, an Enterprise-specific stability capital buffer would reduce the probability of a larger Enterprise's default, aligning the expected impact of its default with that of a smaller Enterprise.

Second, an Enterprise-specific stability capital buffer also would foster liquid, efficient, competitive, and resilient national housing finance markets by creating incentives for each Enterprise to reduce its housing finance market stability risk by curbing its market share and growth in ordinary times, preserving room for a larger role during a period of financial stress.

Third, an Enterprise-specific stability capital buffer could offset any funding advantage that an Enterprise might have on account of being perceived as “too big to fail.” That, in turn, would remove the incentive for counterparties to shift risk to the Enterprise, where that incentive not only increases the housing finance market stability risk posed by the Enterprise but also undermines the competitiveness of the national housing finance markets.

Fourth, a larger capital cushion at an Enterprise could afford the Enterprise and FHFA more time to address emerging weaknesses at the Enterprise that could adversely impact the national housing finance markets. In addition to mitigating national housing finance market risk, the additional time afforded by a larger capital cushion could help FHFA ensure that each Enterprise operates in a safe and sound manner.

Finally, again with respect to safety and soundness, any perception that an Enterprise is “too big to fail” leads to moral hazard that undermines market discipline by creditors and other counterparties over the risk taking at an Enterprise. By increasing the regulatory capital at an Enterprise, the stability capital buffer would shift more tail risk back to the Enterprise's shareholders, which should have the added benefit of offsetting any “too big to fail” funding advantage arising from unpriced tail risk. The resulting enhanced market discipline should enhance safety and soundness by increasing the likelihood that the Enterprise's risks are appropriately managed.

FHFA is proposing a stability capital buffer based on a market share approach. Alternatively, FHFA is seeking comment on an additional approach that would have the Enterprises compute their stability capital buffer in a manner analogous to the U.S. banking approach for determining the GSIB surcharge.

d. Market Share Approach

Under FHFA's market share approach, an Enterprise's stability capital buffer would depend on an Enterprise's share of total residential mortgage debt outstanding that exceeds a threshold of 5.0 percent market share. The stability capital buffer, expressed as a percent of adjusted total assets, would increase by 5 basis points for each percentage point of market share exceeding that threshold. For purposes of determining the stability capital buffer, the Enterprise's mortgage assets would mean the sum of:

• The unpaid principal balance of its single-family mortgage exposures, including any single-family loans that secure MBS guaranteed by the Enterprise;

• The unpaid principal balance of its multifamily mortgage exposures, including any multifamily loans that secure MBS guaranteed by the Enterprise;

• The carrying value of its Enterprise MBS or Ginnie Mae MBS, PLS, and other securitization exposures (other than its retained CRT exposures); and

• The exposure amount of any other mortgage assets.

Residential mortgage debt outstanding would mean the amount of mortgage debt outstanding secured by single-family or multifamily residences that are located in the United States (excluding any mortgage debt outstanding secured by non-farm, non-residential, or farm properties). FHFA would publish the residential mortgage debt outstanding as of the end of each calendar year, potentially using similar data published by the Federal Reserve Board.

Among other considerations, FHFA developed this market share-based calibration of the stability capital buffer based on a linear interpolation between two points. First, FHFA began with an assumption that an Enterprise that has a share of total residential mortgage debt outstanding equal to 5.0 percent—as of September 30, 2019, roughly $632 billion in single-family and multifamily mortgage exposures owned or

guaranteed—would not merit a stability capital buffer to mitigate its national housing finance stability risk. An Enterprise with that 5.0 percent market share would have more assets than U.S. Bancorp ($487.6 billion in total assets, as of September 30, 2019), which is not a GSIB, but less assets than the next largest U.S. banking organization, Morgan Stanley ($902.6 billion in total assets as of September 30, 2019), which is a GSIB.

At the other extreme, the largest GSIB surcharge for a U.S. GSIB is that of JPMorgan Chase, at 3.5 percent of risk-weighted assets as of September 30, 2019. An Enterprise would roughly approximate an equivalent stability capital buffer if it had a 25 percent share of total residential mortgage debt outstanding. At that market share, the Enterprise's stability capital buffer would be 1.00 percent of its adjusted total assets, approximately equivalent to the 3.5 percent surcharge expressed as a percent of risk-weighted assets under the September 30, 2019 average net credit risk weight on the Enterprises' mortgage exposures of 28 percent.

Under this market share approach, as of September 30, 2019, Fannie Mae and Freddie Mac would have had stability capital buffers of, respectively, 1.05 and 0.64 percent of adjusted total assets. Under the September 30, 2019 28 percent average risk weight on their exposures, Fannie Mae and Freddie Mac's stability capital buffers would have been 3.8 and 2.3 percent of risk-weighted assets, respectively, roughly in line with U.S. GSIBs of similar size.

The following Table 7 details the calculation of the proposed stability capital buffer as of December 31, 2007, September 30, 2017, and September 30, 2019.

EP30JN20.006

Question 16. Is the market share approach appropriately formulated and calibrated to mitigate the national housing finance market stability risk posed by an Enterprise? If not, what modifications should FHFA consider to ensure an appropriate calibration?

Question 17. Is the market share approach appropriately formulated and calibrated to ensure each Enterprise operates in a safe and sound manner? If not, what modifications should FHFA consider to ensure an appropriate calibration?

e. Alternative Approach

FHFA is soliciting comment on whether to replace or supplement the market share approach discussed in Section VII.A.3.d with another approach that considers other indicators of the housing finance market stability risk posed by an Enterprise. Other such indicators could include the ownership of the Enterprise's MBS and debt by other financial institutions, the degree of control by the Enterprise over key securitization infrastructure, the extent of the Enterprise's role in aggregating and distributing credit risk through CRT, the Enterprise's reliance on short-term debt funding, or the Enterprise's expected debt issuances during a financial stress to fund purchases of mortgage exposures out of securitization pools.

One specific alternative approach under consideration by FHFA is to replace or supplement the market share approach with a modified version of the U.S. banking framework's two methods for determining a GSIB's capital

surcharge.

Under method 1, a U.S. GSIB determines its capital surcharge using the sum of weighted indicator scores that span five categories correlated with systemic importance—size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity. For each indicator, the U.S. GSIB's indicator score is its own measure of the indicator divided by the aggregate global measure of that indicator, which is based on other GSIBs' measures. Method 2 uses similar inputs but replaces the substitutability indicators with metrics for the U.S. GSIB's reliance on short-term wholesale funding. Method 2 is also calibrated in a manner that generally will result in GSIB capital surcharges that are higher than those calculated under method 1.

12 CFR part 217, subpart. H (Federal Reserve Board).

FHFA is soliciting comment on whether to calibrate the stability capital buffer based on some subset of the U.S. banking framework's five categories—for example, size, interconnectedness, and substitutability—and exclude the indicators for cross-jurisdictional activity or complexity. In particular, cross-jurisdictional activity might not be an important driver of the national housing finance market stability risk posed by an Enterprise.

FHFA is also soliciting comment on whether modifications to the definitions or calculations of the U.S. banking framework's specific GSIB surcharge indicators would be appropriate to ensure the resulting score or scores are correlated with an Enterprise's national housing finance market stability risk. For example, the Enterprises play an integral role in the national housing finance market, and there are few, if any, natural substitutes for that role, but an Enterprise's amount of underwritten transactions in debt and equity markets, one of the substitutability indicators under the U.S. banking framework, might not be strongly correlated with that risk.

Another approach might be to adopt a modified version of the U.S. banking framework's method and then use a similar measure of an Enterprise's reliance on short-term debt funding (perhaps with adjustments for the expected debt issuances during a financial stress to fund purchases of NPLs out of securitization pools) as the basis for a replacement for the U.S. banking framework's method 2.

Question 18. Should the Enterprise-specific stability capital buffer be determined using the U.S. banking framework's approach to calculating capital surcharges for GSIBs?

Question 19. What, if any, modifications to the U.S. banking framework's approach to calculating capital surcharges for GSIBs are appropriate for determining the Enterprise-specific stability capital buffer?

Question 20. Should the Enterprise-specific stability capital buffer be determined based on a sum of the weighted indicators for size, interconnectedness, and substitutability under the U.S. banking framework?

Question 21. Which, if any, indicators of the housing finance market stability risk

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