Public Remarks as Prepared for Delivery

Dr. Mark A. Calabria

Director, Federal Housing Finance Agency

FINANCIAL STABILITY OVERSIGHT COUNCIL
PRINCIPALS MEETING
FRIDAY, SEPTEMBER 25, 2020

Thank you, Mr. Chairman. I commend the Council for this important statement today acknowledging for the first time that any distress affecting the secondary market activities of the Enterprises could pose risk to financial stability.

Let me thank Treasury, the Federal Reserve, and all our colleagues for the partnership that produced today's statement. Let me also recognize that this is the product of the Council's first activities-based review. The Council's work today sets an important precedent in the consideration of nonbank activities going forward.

The Council's review is a necessary and important step in reforming our housing finance system. It is also a key step toward responsibly ending the 12-year conservatorships of the Enterprises. The next critical step is finalizing the regulatory capital framework proposed by FHFA in May, with the benefit of the Council's valuable recommendations.

The Council's review focused on the extent to which FHFA's regulatory framework – particularly the proposed capital rule – would mitigate the potential stability risks posed by the Enterprises. The Council's analysis affirms that the capital rule is necessary and a significant step toward financial stability. 

As the Council found, risk-based capital and leverage ratio requirements materially less than those in the proposed rule would likely not adequately mitigate the potential stability risk posed by the Enterprises. Indeed, more capital might be necessary.

In other findings and recommendations related to the capital rule, the Council confirms the importance of ensuring that each Enterprise is capitalized to remain a viable going concern both during and after a severe economic downturn. A “claims paying capacity" or similar standard is not appropriate for financial institutions of this size and importance.

The Council also affirms the necessity of a dedicated capital buffer that is tailored to mitigate the potential stability risk posed by an Enterprise. The proposed capital rule's adoption of the stability capital buffer was a significant departure from the 2018 proposal and should remain at the center of the regulatory capital framework.

Another departure from the 2018 proposal was the adoption of regulatory capital definitions from the banking framework. The Council's findings also acknowledge the importance of high-quality capital and that it is critical that the Enterprises' regulatory capital framework continues to address weaknesses in the statutory definitions. 

The Council's review also recognizes that the Enterprises' credit risk capital requirements for mortgage exposures remain lower than those of other credit providers. This preserves one of the Enterprises' advantages over other market participants, maintaining undue concentration of risk in the system. I thank the Council for encouraging FHFA and other regulators to continue working toward a level playing field for mortgage credit risk. 

FHFA will consider the Council's findings and recommendations as the Agency finalizes the Enterprises' capital rule in the coming months. 

FHFA will also continue our work to strengthen the entire regulatory framework for the Enterprises to responsibly end the conservatorships. I share the Council's view that appropriate implementation of these reforms will lead to a more durable secondary mortgage market that helps provide sustainable access to mortgage credit through the cycle, and will be more resistant to shocks.

I commend the Council for committing to monitor the activities of the Enterprises and FHFA's implementation of the regulatory framework to ensure potential risks to financial stability are adequately addressed. This includes considering more formal recommendations or other actions consistent with its December 2019 guidance, if the stability risk posed by the Enterprises is not mitigated.

FHFA recognizes the seriousness of the stability risk posed by Enterprise activities to the financial system and commits to the Council that we will ensure that risk is mitigated.

Finally, while the Council's statement today is a critical step toward strengthening our housing finance system, resolving the system's structural flaws requires congressional action. To that end, FHFA's 2019 Annual Report included several legislative recommendations to Congress. FHFA continues to stand ready to work with all who share the goal of building a stronger, more resilient housing finance system. 

Mr. Chairman and fellow members of the Council, I look forward to continuing to work with you on these and future matters. Thank you.