FHFA Issues Final Rule Establishing Regulatory Capital Framework for GSEs

FHFA recently issued a final rule that establishes a post-conservatorship regulatory capital framework for Fannie Mae and Freddie Mac.  The rule will go into effect on February 16, 2020; however, the GSEs will not be subject to the rule’s requirements until the compliance date for each requirement as defined in the rule.

Among other things, the rule requires the GSEs to maintain the following risk-based capital:

• Total capital not less than 8% of risk-weighted assets;
• Adjusted total capital not less than 8% of risk-weighted assets;
• Tier 1 capital not less than 6% of risk-weighted assets; and
• Common equity tier 1 capital not less than 4.5% of risk-weighted assets.

Additionally, the GSEs must satisfy the following leverage ratios:

• Core capital not less than 2.5% of adjusted total assets; and
• Tier 1 capital not less than 2.5% of adjusted total assets.

The rule provides detailed definitions for these capital requirements.  The rule also requires that the GSEs maintain certain capital buffers in order to avoid limits on capital distributions and discretionary bonus payments.