FHFA proposes formal liquidity rules for GSEs

WASHINGTON — The Federal Housing Finance Agency is proposing to codify banklike liquidity requirements it already imposed on Fannie Mae and Freddie Mac that will require the mortgage giants to hold more liquid assets to cover sudden funding shortfalls even after they exit conservatorship.

The proposal, which builds on existing FHFA guidance issued to the government-sponsored enterprises earlier this year, is designed to “protect taxpayers and support the mortgage market,” the agency said in a release.

“A companion to the new capital rule, today’s proposed rule will better ensure that the Enterprises are positioned to fulfill their countercyclical mission,” said FHFA Director Mark Calabria in a statement. “Requiring the Enterprises to have enough liquid assets to continue supporting the mortgage market during times of severe stress protects taxpayers and the housing market.”

The proposed liquidity rules, like the FHFA guidance that the GSEs are already complying with, are broken into four components: a 30-day “cash flow stress test” enabling the GSEs to continue providing market liquidity while also holding a $10 billion buffer; a measure of the companies’ ability to meet cash flows for a year to provide market liquidity under stressed conditions; a minimum ratio of long-term debt to “less-liquid” assets; and minimum standards for the term of liabilities relative to assets.

The requirements resemble liquidity rules the U.S. regulators developed for banks with more than $250 billion of assets following the financial crisis. This includes the so-called Liquidity Coverage Ratio, which went into effect in 2015 and requires financial institutions to hold an amount of high-quality liquid assets that would be enough to fund cash outflows for at least 30 days in a period of stress.

In theory, the proposal would replace the existing liquidity benchmarks, and would be a requirement for the GSEs to meet once the companies are returned to private hands.

The GSEs had warned in filings earlier this year that the new requirements could result in lower net interest income.

“The updated liquidity guidance is more stringent than our existing liquidity requirements and liquidity requirements of banks and other depository institutions, which could result in higher funding costs in the future and may negatively affect our net interest income,” Freddie said in its second-quarter 10-Q filing. “In addition, the updated liquidity guidance may impact the size and the allowable investments in our other investments portfolio.”

FHFA is accepting comments on the proposal for 60 days after it is published in the Federal Register.

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