November, the Federal Housing Finance Agency (FHFA) released a new regulatory
capital framework for Fannie Mae and Freddie Mac (the GSEs). At the time FHFA
said the final rule fulfills Congress’s
mandate in the Housing and Economic Recovery Act of 2008 that FHFA establish
risk-based capital requirements for the GSEs to ensure their safety and
soundness by increasing the quantity and quality of their regulatory capital
and reducing the pro-cyclicality of the aggregate capital requirements. This week the
agency submitted for comments a companion rule regarding liquidity requirements
for the two companies.
The agency says its rule is designed to ensure that the GSEs are a source of
strength for the mortgage market during downturns in the economy, and to
incentivize them to issue an appropriate and stable mix of debt over the long
term. The proposed rule takes into account the GSEs’ lack of access to the Federal
Reserve Bank discount window, unique structure, and public charter. Currently, Fannie
Mae and Freddie Mac would meet or exceed all requirements of the proposed rule.
There are four liquidity requirements. The first two are cash-flow based.
One is a short-term (30 days) requirement based on a cumulative net cash
outflow analysis, plus an additional $10 billion cushion requirement that must
be met by highly liquid assets, like Treasury securities. The second is a 365-day
requirement extending the short-term cumulative cash outflow analysis to a full
year. During the longer period, the GSEs can count borrowings against certain instruments
which cannot be counted under the 30-day requirement but are deemed eligible
collateral by the Fixed Income Clearing Corporation. There is no separate
excess cushion required under this metric.
There are also two long term liquidity and funding requirements. The ratio
of long-term unsecured debt to less-liquid assets must be greater than 120
percent; and the ratio of the spread duration of unsecured debt to the spread
duration of retained portfolio assets must be greater than 60 percent.
says the proposed rule is a result of the experience FHFA has gained from
managing the GSEs’ liquidity positions during the 12 years of conservatorship.
The rule seeks to implement minimum liquidity and funding requirements, daily
and monthly disclosure of liquidity positions and other liquidity-related
FHFA Director Mark Calabria said, “During the 2008 financial crisis, Fannie
Mae and Freddie Mac did not have enough truly liquid assets nor did they have
consistent access to the longer-term unsecured debt markets. This liquidity and
funding failure, along with their low capital levels, necessitated placing the [GSEs]
into conservatorship. A companion to the new capital rule, today’s proposed
rule will better ensure that the [GSEs] are positioned to fulfill their
countercyclical mission. Requiring [them] to have enough liquid assets to
continue supporting the mortgage market during times of severe stress protects
taxpayers and the housing market.”
Parties wishing to comment on the proposed rule have 60 days after its publication
in the Federal Register. Comments can be made at FHFA.gov.