WASHINGTON Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight, told industry officials last week that the agencys imminent risk-based capital rule for Fannie Mae and Freddie Mac would be consistent with recently proposed changes to international capital standards.
Speaking on Thursday at an Americas Community Bankers real-estate lending conference in Scottsdale, Ariz. Mr. Falcon detailed how his agencys rule and supervisory practices echo the three core principles of capital requirements, supervisory review, and market discipline in the Basel Committee on Banking Supervisions Jan. 16 proposal to update international capital regulations.
Mr. Falcon said that once his agencys proposed risk-based capital regulation is approved by the Office of Management and Budget, Fannie Mae and Freddie Mac will be subject to the most sophisticated capital standard of any financial institution. However, Mr. Falcon continued to withhold the rules details, and it is unclear how soon the management and budget office will approve the regulation because the new Bush administration is still getting its bearings.
He said that his agencys risk-based capital rule will go further than bank regulators have in determining capital levels and ensuring capital adequacy.
I dont mean to imply that the banking standard is inappropriate not at all, Mr. Falcon said. But the new Basel Accord, like OFHEOs risk-based capital standard, recognizes the need to more closely tie capital to risk. And because these approaches give institutions credit for risk mitigation activities, the institutions that manage risk well will be rewarded with a lower capital requirement.
He noted that the agency already requires Fannie and Freddie to hold 250 basis points of capital against on-balance sheet assets and 45 basis points of capital against off-balance sheet obligations. And he added that upcoming rule, as required by law, will assess a 30% capital charge for management and operations risk on the government-sponsored enterprises.
The agencys 27 examiners meet the second Basel principal of supervisory review through current on- and off-site exams, he said.
Mr. Falcon said the agency is taking further steps to enhance its exam process. For example, the agency recently added a model exposure examination group that will assess the automated models for judging the quality of loans to be purchased used by Fannie and Freddie, he said.
He said the regulator also is planning to take a closer look at the enterprises electronic commerce transactions.