Is their model the US government agency FHA or a commercial bank like Wells Fargo? FHA or a commercial bank, what’s it going to be?
Let’s take a look at the FHFA’s proposed rule.
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 11 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.
Of course, neither Fannie Mae or Freddie Mac currently have any regulatory capital (intended).
But US commercial banks have CET1 (Basel III Estimated Tier 1 Common Ratio) of 11% in 2019.
So, FHFA wants Fannie Mae and Freddie Mac to have commercial banks capital ratios despite the fact that GSEs are NOT depository institutions. And Bloomberg is saying Fannie and Freddie will need $200 billion in capital buffers.
There are other rules in the FHFA’s proposal, but I would ask FHFA is they want Fannie and Freddie regulated like a commercial bank (with The Fed regulating them) or like the FHA that maintains a fund required by Congress to maintain at least a 2% ratio in reserves.
So, commercial banks or the FHA? What’s it going to be?