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Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules
lotter on DSK11XQN23PROD with PROPOSALS1

requirements, and the quantity of capital requirements.
However, FHFA is concerned that certain aspects of the ERCF might create disincentives in the Enterprises CRT
programs that may result in taxpayers bearing excessive undue risk for as long as the Enterprises are in conservatorships and excessive risk to the housing finance market both during and after conservatorships. This concern is heightened by the fact that the Enterprises presently are severely undercapitalized and lack the resources on their own to safely absorb the credit risk associated with their normal operations. In conservatorships, the Enterprises are supported by Senior Preferred Stock Purchase Agreements 1
PSPAs between the U.S. Department of the Treasury the Treasury and each Enterprise, through FHFA as its conservator. Until recently, the PSPAs significantly limited the Enterprises ability to hold capital, and only in January 2021 were the upper bounds on retained capital removed. During this period where the Enterprises are building capital, the taxpayers continue to be at heightened risk through potential PSPA draws in the event of a significant stress to the housing sector.
The Enterprises have developed their CRT programs over the last several years under FHFAs oversight through guidelines, instructions, strategic plans, and scorecard objectives. FHFA views the transfer of risk, particularly credit risk, to a broad set of investors as an important tool to reduce taxpayer exposure to the risks posed by the Enterprises and to mitigate systemic risk caused by the size and monoline nature of the Enterprises businesses. If the Enterprises were to substantially shrink their risk transfer programs for an extended period, either in response to regulatory policies or macroeconomic conditions, potential taxpayer exposure and systemic risk may increase as a result.
The refinements in this proposal would lessen the potential deterrents to Enterprise risk transfer. Specifically, the proposed rule would amend the ERCF
to:
Replace the fixed PLBA equal to 1.5
percent of an Enterprises adjusted total 1 Fannie Maes Amended and Restated Senior Preferred Stock Purchase Agreement with Treasury September 26, 2008, https www.fhfa.gov/
Conservatorship/Documents/Senior-PreferredStock-Agree/FNM/SPSPA-amends/FNM-Amendand-Restated-SPSPA_09-26-2008.pdf; Freddie Macs Amended and Restated Senior Preferred Stock Purchase Agreement with Treasury September 26, 2008, https www.fhfa.gov/
Conservatorship/Documents/Senior-PreferredStock-Agree/FRE/SPSPA-amends/FRE-Amendedand-Restated-SPSPA_09-26-2008.pdf.

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assets with a dynamic PLBA equal to 50
percent of the Enterprises stability capital buffer as calculated in accordance with 12 CFR 1240.400;
Replace the prudential floor of 10
percent on the risk weight assigned to any retained CRT exposure with a prudential floor of 5 percent on the risk weight assigned to any retained CRT
exposure; and Remove the requirement that an Enterprise must apply an overall effectiveness adjustment to its retained CRT exposures in accordance with the ERCFs securitization framework in 12
CFR 1240.44f and i.
The proposed rule would also make technical corrections to various provisions of the ERCF that was published on December 17, 2020.
The PSPAs between the Treasury and each Enterprise, through FHFA as its conservator, as amended by letter agreements executed by the parties on January 14, 2021,2 include a covenant at section 5.15 which states: The Enterprise shall comply with the Enterprise Regulatory Capital Framework published in the Federal Register at 85 FR 82150 on December 17, 2020 disregarding any subsequent amendment or other modifications to that rule. Modifying that covenant will require agreement between the Treasury and FHFA under section 6.3 of the PSPAs.
II. Background and Rationale for the Proposed Rule A. PLBA
Background The ERCF requires an Enterprise to maintain a leverage ratio of tier 1 capital to adjusted total assets of at least 2.5
percent. In addition, to avoid limits on capital distributions and discretionary bonus payments, an Enterprise must also maintain a fixed tier 1 capital PLBA
equal to at least 1.5 percent of adjusted total assets.
The primary purpose of the combined leverage requirement and PLBA is to serve as a non-risk-based supplementary measure that provides a credible backstop to the combined risk-based capital requirements and prescribed capital conservation buffer amount PCCBA, where the PCCBA comprises the stability capital buffer, the stress capital buffer, and the countercyclical capital buffer. This type of simple, 2 2021 Fannie Mae Letter Agreement January 14, 2021, https home.treasury.gov/system/files/136/
Executed-Letter-Agreement-for-Fannie-Mae.pdf;
2021 Freddie Mac Letter Agreement January 14.
2021, https home.treasury.gov/system/files/136/
Executed-Letter-Agreement-for-Freddie%20
Mac.pdf.

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transparent, and independent measure of risk provides an important safeguard against model risk and measurement error in the risk-based capital requirements and acquisition strategies of the Enterprises. FHFAs rationale for the leverage requirement and buffer is consistent with that of U.S. and international banking regulators, although the size of each regulators leverage buffer varies by regulatory regime. In the U.S., large banking organizations must maintain an enhanced supplementary leverage ratio eSLR of 2 percent of total leverage exposure on top of their 3 percent supplementary leverage ratio SLR to avoid restrictions on distributions and discretionary bonuses. Internationally, systemically important banks are required to hold a leverage buffer that varies by the banks systemic importance.
The Enterprises are chartered to fulfill a countercyclical role in the housing finance market. The COVID19
pandemic, while unique and not the basis for this proposed rule, has effectively illustrated why a dynamic leverage buffer may be appropriate for the Enterprises. During the pandemic, as many mortgage market participants pulled back from the market due to capital and liquidity constraints, the Enterprises stepped in to fulfill their countercyclical role, leading to greater reliance on Enterprise execution for conforming mortgages. This, combined with the Board of Governors of the Federal Reserve Systems Federal Reserve monthly purchases of $40
billion in Agency mortgage-backed securities MBS, caused the Enterprises balance sheets to expand considerably. As a result, the PLBA
represents an increasingly large component of the Enterprises capital requirements and capital buffers relative to when FHFA calibrated the PLBA in 2019. In addition, the combined leverage requirement and PLBA exceeds the combined risk-based capital requirement and PCCBA at some level for both Enterprises. The leverage requirement and current PLBA are based on adjusted total assets, which is a relatively stable measure over time.
Given this calibration, FHFA expects the current relationships between leverage and risk-based capital at the Enterprises will continue for the foreseeable future. When leverage capital is consistently the binding capital constraint, it provides an incentive for an institution to increase risk taking because taking on more risk is not reflected in commensurately higher capital requirements, while
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