WASHINGTON The Office of Federal Housing Enterprise Oversight, the safety and soundness regulator of Fannie Mae and Freddie Mac, has decided to add a capital measurement to its quarterly capital classifications for the two companies.
The new capital measurement, which the regulator unveiled Feb. 13 and will introduce in its fourth-quarter 2000 report, is called critical capital level. If the amount of Fannies or Freddies core capital falls below this level, the company would have to be classified as critically undercapitalized and probably placed in conservatorship.
The agency said that though Fannie and Freddie each hold roughly twice as much capital as required by the standard, the additional disclosure would help investors more accurately monitor their health.
The companies recent decision to issue subordinated debt with a provision that ties possible suspension of interest payments to critical capital adds to the significance of that capital figure, agency Director Armando Falcon Jr. wrote in letters to Fannie and Freddie. A potential benefit of subordinated debt issuance is increased market discipline, and public knowledge about current critical capital levels may promote such discipline.
The regulator already determines the two government-sponsored enterprises capital adequacy by establishing minimum and risk-based capital standards. Critical capital is to be determined using a formula based on the companies balance-sheet assets and off-balance-sheet obligations.