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Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules
greater risk may generate greater returns.
When leverage capital sufficiently exceeds risk-based capital, high risk exposures and low risk exposures have the same capital requirements, so an Enterprise has an incentive to acquire higher-risk, higher-yielding mortgages, all else equal.
As of March 31, 2021, Fannie Maes tier 1 leverage capital requirement plus PLBA of 4 percent was the binding capital constraint relative to their estimated common equity tier 1 CET1

capital requirement plus PCCBA of 3.3
percent and their estimated tier 1 riskbased capital requirement plus PCCBA
of 3.8 percent, all relative to adjusted total assets. Fannie Maes estimated adjusted total capital requirement plus PCCBA of 4.5 percent relative to adjusted total assets was their only riskbased capital requirement that exceeded their leverage capital requirement plus PLBA. At Freddie Mac, the leverage capital requirement plus PLBA was the binding capital constraint relative to
every risk-based capital metric. Freddie Macs estimated CET1 capital requirement plus PCCBA of 2.8 percent, estimated tier 1 risk-based capital requirement plus PCCBA of 3.2 percent, and estimated adjusted total capital requirement plus PCCBA of 3.8 percent, all relative to adjusted total assets, were each smaller than their tier 1 leverage capital requirement plus PLBA of 4
percent.

Figure 1: Estimated Enterprise Capital Requirements and Buffers relative to Adjusted Total Assets, as of March 31, 2021

4.5%
4.0%

3.8%
3.3%

1.5%

2.8%

1.8%

1.5%

1.5%

1.8%
1.5%

Fannie Mae Adj. Total, PCCBA

l!il Capital Requirement
lotter on DSK11XQN23PROD with PROPOSALS1

4.0%

3.2%

1.8%

Fannie Mae Fannie Mae CET1, PCCBA Tier 1, PCCBA

For the Enterprises combined, the tier 1 leverage capital requirement plus PLBA was approximately 12 percent larger than the combined tier 1 riskbased capital requirement plus PCCBA
relative to adjusted total assets as of March 31, 2021. This excess of total leverage capital over tier 1 risk-based capital has grown from 10 percent when FHFA calibrated the ERCF near the end of 2019a 20 percent increase in only two years. The leverage requirement and PLBA are met with tier 1 capital, while the tier 1 risk-based capital requirement and PCCBA are met with tier 1 capital and CET1 capital respectively, which allows for the most direct comparison of leverage capital to risk-based capital. In addition, CET1 capital and tier 1 capital represent the highest quality and second-highest quality forms of capital, respectively, so examining the binding nature of the tier 1 leverage requirement relative to the tier 1 risk-based capital requirement is prudent when
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3.8%

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Fannie Mae Leverage, PLBA

D Buffer
Freddie Mac Freddie Mac CET1, PCCBA Tier 1, PCCBA

Rationale for Revisiting the PLBA
The primary purpose of the ERCFs leverage requirement and PLBA is to serve as a credible backstop to the riskbased capital requirements and riskbased capital buffers. This is consistent with the stated purpose of the SLR and eSLR in the U.S. banking framework.3
FHFA is proposing a recalibration of the PLBA because a leverage ratio that exceeds risk-based capital requirements throughout the economic cycle could lead to undesirable outcomes at the 3 In a June 2021 Federal Open Market Committee press conference, the Federal Reserve Chairman stated: Our position has been for a long time, and it is now, that wed like the leverage ratio to be a backstop to risk-based capital requirements. When leverage requirements are binding it does skew incentives for firms to substitute lower-risk assets for high-risk ones. See https
www.federalreserve.gov/mediacenter/files/FOMC
presconf20210616.pdf.

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Freddie Mac Leverage, PLBA

Requirement plus Buffer
considering the safety and soundness of the Enterprises.

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Freddie Mac Adj. Total, PCCBA

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Enterprises, including promoting risktaking and creating disincentives for CRT and other forms of risk transfer.
Evolutions in the international and U.S.
banking frameworks and public comments on FHFAs 2020 re-proposed capital rule support the proposed PLBA
recalibration.
Financial regulators and policymakers have consistently investigated ways to lower the quantity of leverage required for banks, with a specific focus on the SLR and eSLR. In the U.S., banking regulators require global systemically important banks GSIBs to hold tier 1
capital in excess of 5 percent of total onand-off balance sheet assets measured using total leverage exposure, which is comparable to adjusted total assets at the Enterprises consisting of a 3 percent minimum SLR and a 2 percent leverage buffer the eSLR. Internationally, Basel III standards require systemically important banks to hold a tier 1 capital leverage ratio buffer in excess of a 3

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EP27SE21.001

5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%