FHFA Publishes Final Rule on Annual Enterprise Capital Plans
Written By: Joel Palmer, Op-Ed Writer
The Federal Housing Finance Agency (FHFA) has published another final rule related to the Enterprise Regulatory Capital Framework (ERCF).
Last week, FHFA released a final rule, proposed in December 2021, that requires Fannie Mae and Freddie Mac to submit annual capital plans to the agency and provide notice prior to taking certain capital actions.
“The final rule provides the enterprises with a stable regulatory framework that ensures the amount of capital held is commensurate with each of their risk profiles,” said FHFA Acting Director Sandra L. Thompson. “This is an important step in securing the safety and soundness of the Enterprises by actively monitoring and maintaining proper levels of capital throughout the economic cycle.”
The previous week, FHFA published a final rule requiring new public disclosure requirements for Fannie and Freddie.
The latest final rule mandates that the enterprises develop capital plans that include:
An assessment of the expected sources and uses of capital over the planning horizon
Estimates of projected revenues, expenses, losses, reserves, and pro forma capital levels under a range of the enterprise's internal scenarios, as well as under FHFA's scenarios
A description of all planned capital actions over the planning horizon
A discussion of how the enterprise will, under expected and stressful conditions, maintain capital commensurate with the business risks and continue to serve the housing market
A discussion of any expected changes to the enterprise's business plan that are likely to have a material impact on the Enterprise's capital adequacy or liquidity
The final rule also incorporates the stress capital buffer determination from the ERCF into the capital planning process.
The requirements in the final rule are consistent with the regulatory framework for capital planning for large bank holding companies.
The final rule incorporates the stress capital buffer from the regulatory capital framework that was finalized in November 2020 under FHFA’s previous leadership and amended in September 2021.
The buffer is determined by FHFA, and the calculation is based on the results of a supervisory stress test, subject to a floor of 0.75 percent of the enterprise’s adjusted total assets as of the last day of the previous calendar quarter.
During the comment period, Freddie Mac suggested eliminating the 0.75 floor, supervisory stress test, and inclusion of planned dividends in the stress capital buffer calculation, while offering suggestions on what to use instead.
According to the final rule document, Freddie Mac said the floor of 0.75 percent of adjusted total assets is inappropriate for the Enterprises. They stated that for banks, the static floor was intended to address concerns that larger institutions could use a dynamic stress capital buffer based on stress testing to lower their capital requirements relative to smaller peers.
Under the final rule, Fannie and Freddie will submit plans to FHFA by May 20 of each year. They will submit their first capital plans on May 20, 2023.
