FHFA Proposes Expanded Disclosures for GSEs
Written By: Joel Palmer, Op-Ed Writer
The Federal Housing Finance Agency (FHFA) has proposed a rule to add public disclosure requirements for the Enterprise Regulatory Capital Framework (ERCF) for Fannie Mae and Freddie Mac.
The proposed rule would implement quarterly quantitative and qualitative disclosure requirements for the enterprises related to regulatory capital instruments, risk-weighted assets calculated under the ERCF’s standardized approach, and risk management policies and procedures.
“These additional public disclosure requirements are intended to promote market discipline and prudent risk management practices at the Enterprises,” said FHFA Acting Director Sandra L. Thompson. “These changes also will provide market participants with more information to assess an Enterprise’s risks and capital adequacy. In addition the proposed changes increase the transparency of the safety and soundness of the Enterprises while decreasing risk to the U.S. taxpayers.”
A summary of the proposed rule explains that, while banks use either a standardized approach or an advanced approach to satisfy disclosure requirements, Fannie and Freddie are required to use both. The proposed rule adapts the public disclosure requirements in the U.S. banking framework to reflect the ERCF’s standardized approach.
The standardized approach disclosures in the proposed rule cover 11 categories:
Capital structure
Capital adequacy
Capital buffers
Credit risk
General disclosure for counterparty credit risk-related exposures
Credit risk mitigation
Credit risk transfers (CRT) and securitization
Equities
Interest rate risk for non-trading activities
Operational risk
Tier 1 leverage ratio
FHFA said it aims to “strike an appropriate balance between the market benefits of disclosure and the additional financial burden” of providing the disclosures.
The proposed rule’s market risk disclosure requirements include quarterly quantitative disclosures for each material portfolio of covered positions related to exposure and risk-weighted asset amounts as well as the aggregate amount of on-balance sheet and off-balance sheet securitization positions by exposure type.
In addition, an enterprise would be required to make annual public disclosures for each material portfolio of covered positions related generally to portfolio composition and valuation policies, procedures, and methodologies. These disclosures would include key valuation assumptions and information on significant changes, model characteristics used to calculate risk-weighted assets for market risk, and a description of the approaches used for validating and evaluating the accuracy of internal models and modeling processes.
In addition, the annual disclosures would include a description of the enterprise’s processes for monitoring changes in the credit and market risk of securitization positions and a description of the Enterprise’s policy governing the use of credit risk mitigation to mitigate the risks of securitization and resecuritization positions.
Fannie and Freddie will have six months from publication of the final rule to comply with the new disclosure requirements.
FHFA invites comments on the proposed rule. Comments should be submitted electronically or via mail to the Federal Housing Finance Agency, Office of General Counsel, Attention: Comments/RIN 2590-AB18, 400 7th Street, S.W., Washington, D.C., 20219.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
