Proposed Rule2021-27589
Capital Planning and Stress Capital Buffer Determination
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 27, 2021
Issuing agencies
Federal Housing Finance Agency
Abstract
The Federal Housing Finance Agency (FHFA or the Agency) is proposing to require the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac, and with Fannie Mae, each an Enterprise) to submit annual capital plans to the Agency and provide prior notice for certain capital actions (the proposal or proposed rule). The Agency is also incorporating the determination of the stress capital buffer into the capital planning process. The requirements in this proposal are consistent with the regulatory framework for capital planning for large bank holding companies.
Full Text
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[Federal Register Volume 86, Number 245 (Monday, December 27, 2021)]
[Proposed Rules]
[Pages 73187-73194]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-27589]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 86, No. 245 / Monday, December 27, 2021 /
Proposed Rules
[[Page 73187]]
FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1240
RIN 2590-AB16
Capital Planning and Stress Capital Buffer Determination
AGENCY: Federal Housing Finance Agency.
ACTION: Notice of proposed rulemaking: Request for comments.
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SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency) is
proposing to require the Federal National Mortgage Association (Fannie
Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac, and
with Fannie Mae, each an Enterprise) to submit annual capital plans to
the Agency and provide prior notice for certain capital actions (the
proposal or proposed rule). The Agency is also incorporating the
determination of the stress capital buffer into the capital planning
process. The requirements in this proposal are consistent with the
regulatory framework for capital planning for large bank holding
companies.
DATES: Comments must be received on or before February 25, 2022.
ADDRESSES: You may submit your comments on the proposed rule,
identified by regulatory information number (RIN) 2590-AB16, by any one
of the following methods:
<bullet> Agency website: <a href="http://www.fhfa.gov/open-for-comment-or-input">www.fhfa.gov/open-for-comment-or-input</a>.
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by email
to FHFA at <a href="/cdn-cgi/l/email-protection#5604333115393b3b3338222516303e303778313920"><span class="__cf_email__" data-cfemail="89dbeceecae6e4e4ece7fdfac9efe1efe8a7eee6ff">[email protected]</span></a> to ensure timely receipt by FHFA.
Include the following information in the subject line of your
submission: Comments/RIN 2590-AB16.
<bullet> Hand Delivered/Courier: The hand delivery address is:
Clinton Jones, General Counsel, Attention: Comments/RIN 2590-AB16,
Federal Housing Finance Agency, 400 Seventh Street SW, Washington, DC
20219. Deliver the package at the Seventh Street entrance Guard Desk,
First Floor, on business days between 9 a.m. and 5 p.m.
<bullet> U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Clinton Jones,
General Counsel, Attention: Comments/RIN 2590-AB16, Federal Housing
Finance Agency, 400 Seventh Street SW, Washington, DC 20219. Please
note that all mail sent to FHFA via U.S. Mail is routed through a
national irradiation facility, a process that may delay delivery by
approximately two weeks. For any time-sensitive correspondence, please
plan accordingly.
FOR FURTHER INFORMATION CONTACT: Andrew Varrieur, Acting Senior
Associate Director, Office of Capital Policy, (202) 649-3141,
<a href="/cdn-cgi/l/email-protection#3c7d52584e594b126a5d4e4e5559494e7c5a545a5d125b534a"><span class="__cf_email__" data-cfemail="d796b9b3a5b2a0f981b6a5a5beb2a2a597b1bfb1b6f9b0b8a1">[email protected]</span></a>; Ron Sugarman, Principal Policy Analyst,
Office of Capital Policy, (202) 649-3208, <a href="/cdn-cgi/l/email-protection#98caf7f6b6cbedfff9eaf5f9f6d8fef0fef9b6fff7ee"><span class="__cf_email__" data-cfemail="396b5657176a4c5e584b545857795f515f58175e564f">[email protected]</span></a>; or
Mark Laponsky, Deputy General Counsel, Office of General Counsel, (202)
649-3054, <a href="/cdn-cgi/l/email-protection#d499b5a6bffa98b5a4bbbaa7bfad94b2bcb2b5fab3bba2"><span class="__cf_email__" data-cfemail="c38ea2b1a8ed8fa2b3acadb0a8ba83a5aba5a2eda4acb5">[email protected]</span></a>. These are not toll-free numbers. For
TTY/TRS users with hearing and speech disabilities, dial 711 and ask to
be connected to any of the contact numbers above.
SUPPLEMENTARY INFORMATION:
Comments
FHFA invites comments on all aspects of the proposed rule. Copies
of all comments will be posted without change and will include any
personal information you provide, such as your name, address, email
address, and telephone number, on the FHFA website at <a href="https://www.fhfa.gov">https://www.fhfa.gov</a>. In addition, copies of all comments received will be
available for examination by the public through the electronic
rulemaking docket for this proposed rule also located on the FHFA
website.
Table of Contents
I. Background
II. Capital Plans
A. Annual Capital Planning Requirement
B. Mandatory Elements of a Capital Plan
C. FHFA Review of a Capital Plan
D. Resubmission of a Capital Plan
III. Approval Requirements for Certain Capital Actions and Post
Notice Requirement
IV. Stress Capital Buffer
A. Determination of the Stress Capital Buffer
B. Conforming Amendments to the ERCF
V. Regulatory Analyses
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
I. Background
FHFA is proposing to require the Enterprises to submit annual
capital plans to the Agency and provide prior notice for certain
capital actions. The Agency is also incorporating the determination of
the stress capital buffer from the final Enterprise Regulatory Capital
Framework (ERCF) into the capital planning process. The requirements in
this proposal are consistent with the regulatory framework for capital
planning for large bank holding companies.
During the years leading up to the 2007 financial crisis, many
financial institutions made significant distributions of capital, in
the form of stock repurchases and dividends, without due consideration
of the effects that a prolonged economic downturn could have on their
capital adequacy and ability to continue to operate and remain credit
intermediaries during times of economic and financial stress. In 2011,
the Board of Governors of the Federal Reserve System (Board) first
proposed amendments to Regulation Y (12 CFR 225.8) to require large
banks to submit annual capital plans and to provide notice before
making certain capital distributions.\1\
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\1\ Originally, as a part of the capital plan rule, the Board
could object to a firm's capital plan based on a qualitative
assessment. However, amendments in 2019 changed this requirement
such that after the 2020 Comprehensive Capital Analysis and Review
(CCAR), no firm would be subject to a potential qualitative
objection if the firm successfully passed several qualitative
evaluations. All firms subject to the Board's capital plan rule have
successfully passed the required number of qualitative evaluations
such that no firms are subject to the qualitative objection going
forward. In 2020, the Board's rule was amended to incorporate the
stress capital buffer into the capital planning process. The Board
made further updates to the rule in 2021, primarily to tailor the
requirements based on risk.
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FHFA's proposal builds upon the Agency's existing supervisory
expectation that the Enterprises should have robust systems and
processes in place that incorporate forward-looking projections of
revenue and losses to monitor and maintain their internal
[[Page 73188]]
capital adequacy. In FHFA's opinion, the Enterprises generally should
operate with capital positions well above the minimum regulatory
capital ratios, with the amount of capital held commensurate with each
Enterprise's risk profile. The Enterprises should have internal
processes for assessing their capital adequacy that reflect a full
understanding of their risks and ensure that they hold capital
corresponding to those risks to maintain overall capital adequacy.
The board of directors and senior management of the Enterprises are
ultimately responsible for overseeing an Enterprise's capital planning
strategies and internal capital adequacy processes. The proposal does
not diminish the responsibility of the Enterprise and its board of
directors and senior management with respect to capital planning.
Rather, the proposal is intended to: (i) Establish minimum supervisory
standards for such strategies and processes for the Enterprises; (ii)
describe how the boards of directors and senior management of the
Enterprises should communicate the strategies and processes, including
any material changes to FHFA; and (iii) provide FHFA with an
opportunity to review the Enterprises' planned capital distributions.
The proposal is also consistent with FHFA's practice of requiring
company-run stress tests from each Enterprise. In 2014, the Agency
began requiring its regulated entities to conduct stress tests pursuant
to the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (Dodd-Frank Act). As amended by section 401 of the Economic
Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), the
Dodd-Frank Act requires certain financial companies with total
consolidated assets of more than $250 billion, and which are regulated
by a primary federal financial regulatory agency, to conduct periodic
stress tests to determine whether the companies have sufficient capital
to absorb losses and support operations during adverse economic
conditions.
Dodd-Frank Act stress testing (DFAST) is a forward-looking exercise
that assesses the impact on capital levels that would result from
immediate financial shocks and nine quarters of adverse economic
conditions. FHFA requires Fannie Mae and Freddie Mac to submit the
results of stress tests based on two scenarios: A baseline scenario and
a severely adverse scenario. The Agency aligned its DFAST scenario
variables and assumptions with those used by the Board for its stress
testing of banks. The Agency's dates for the capital plan submission
and initial notice of the stress capital buffer lag the timeline
imposed by the Board by 45 days. This is due to differences in the
timing of the implementation of the annual DFAST process for banks
versus the Enterprises. FHFA provides the Enterprises with DFAST
instructions and guidance with a 30-day lag after the Board issues
instructions to the banks. The Enterprises also report DFAST results to
FHFA with a 30-day lag compared to the banks reporting results to the
Board. Under the proposal, the Enterprises would need to submit their
capital plans to FHFA by May 20, the same date that the DFAST results
are due to the Agency. FHFA and the Enterprises release DFAST results
to the public between August 1 and August 15. By August 15, the Agency
would also provide the Enterprises with initial notices of their stress
capital buffers. The final stress capital buffers will be provided to
the Enterprises on August 31 and they will be effective on October 1.
These last two dates align with the banking timeline.
The Federal Housing Enterprises Financial Safety and Soundness Act
of 1992 establishes minimum leverage ratios for the Enterprises by
statute and requires FHFA to establish risk-based capital levels for an
Enterprise by regulation. FHFA may also set higher leverage
requirements by regulation. FHFA did both in the ERCF, published in the
Federal Register on December 17, 2020 (85 FR 82198, 12 CFR part
1240).\2\ FHFA may address an Enterprise's failure to meet a capital
threshold that is required by statute or regulation through enforcement
mechanisms. For example, pursuant to FHFA's Prompt Corrective Action
and general enforcement authority, it may require an Enterprise to
develop and implement a capital restoration plan, restrict asset growth
or activities, and take other appropriate actions to remediate the
violation of law.\3\ The Agency may also use the enforcement tools
available under its authority to prescribe and enforce prudential
management and operations standards (PMOS).\4\ The Enterprises are
currently in conservatorship, are subject to the restrictions of the
Senior Preferred Stock Purchase Agreements between them and the U.S.
Treasury, and do not hold capital anywhere near the levels specified in
the ERCF. The capital plans will allow the Enterprises to identify the
amount of capital they need to raise to close the gap with the ERCF,
and to consider the timing of when to raise capital, and what types of
capital to raise. The provisions on capital distributions of this
proposed rule, like those of the ERCF, are unlikely to be of practical
effect soon. This proposed rule, like the ERCF, is intended to provide
a stable regulatory framework for the Enterprises for an extended
period, including after they achieve adequate capitalization under the
ERCF.
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\2\ FHFA subsequently proposed amendments to refine the
prescribed leverage buffer amount and capital treatment of credit
risk transfers, 86 FR 53230 (Sept. 27, 2021), and proposed a rule to
introduce additional public disclosure requirements, 86 FR 60589
(Nov. 3, 2021).
\3\ See 12 U.S.C. ch. 46, subch. II (Prompt Corrective Action),
& subch. III (general enforcement authority).
\4\ See 12 U.S.C. 4513b. The ERCF is a prudential standard for
purposes of that statutory section, 12 CFR 1240.1(e)(3).
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II. Capital Plans
A. Annual Capital Planning Requirement
The proposal would require an Enterprise to develop and maintain a
capital plan. For purposes of the proposal, a capital plan is defined
as a written presentation of the Enterprise's capital planning
strategies and capital adequacy processes that includes a set of
mandatory elements.
An Enterprise must submit its complete capital plan to FHFA by May
20 of each calendar year, or such later date as directed by the Agency.
The Enterprise's board of directors or a designated committee thereof
must at least annually, review the robustness of the Enterprise's
process for assessing capital adequacy, ensure that any deficiencies in
the Enterprise's process for assessing capital adequacy are
appropriately remediated, and approve the Enterprise's capital plan
before it is submitted to the Agency.
B. Mandatory Elements of a Capital Plan
A capital plan would be required to contain at least the following
elements:
1. An assessment of the expected sources and uses of capital over
the planning horizon that reflects the Enterprise's size, complexity,
risk profile, and scope of operations, assuming both expected and
stressful conditions.
2. Estimates of projected revenues, expenses, losses, reserves, and
pro forma capital levels, including regulatory capital ratios, and any
additional capital measures deemed relevant by the Enterprise, over the
planning horizon under a range of scenarios, including the Enterprise's
Internal baseline scenario and at least one Internal stress scenario,
as well as any additional scenarios that FHFA may
[[Page 73189]]
provide the Enterprise after giving notice to the Enterprise.
3. A discussion of the results of any stress test required by law
or regulation, and an explanation of how the capital plan takes these
results into account.
4. A description of all planned capital actions over the planning
horizon. Planned capital actions must be consistent with any effective
capital distribution limitations established by FHFA by order or
regulation. The Enterprise must also consider its regulatory capital
buffers in planning capital actions.
5. A discussion of how the Enterprise will, under expected and
stressful conditions, maintain capital commensurate with its risks, and
maintain capital above the regulatory capital ratios.
6. A discussion of how the Enterprise will, under expected and
stressful conditions, maintain sufficient capital to continue its
operations by maintaining ready access to funding, meeting its
obligations to creditors and other counterparties, and continuing to
serve as a credit intermediary.
7. The Enterprise's capital policy (defined below).
8. A discussion of any expected changes to the Enterprise's
business plan that are likely to have a material impact on the
Enterprise's capital adequacy or liquidity.
These proposed mandatory elements of a capital plan are consistent
with FHFA's existing supervisory practice with respect to the
information that it expects the Enterprises to include in a capital
plan for internal planning purposes.
For purposes of the proposal, a capital action would be defined as
any issuance of a debt or equity capital instrument, any capital
distribution, and any similar action that FHFA determines could impact
an Enterprise's consolidated capital.
A capital distribution would be defined as a redemption or
repurchase of any debt or equity capital instrument, a payment of
common or preferred stock dividends, a payment that may be temporarily
or permanently suspended by the issuer on any instrument that is
eligible for inclusion in the numerator of any minimum regulatory
capital ratio, and any similar transaction that FHFA determines to be
in substance a distribution of capital.
Capital policy would be defined as the written principles and
guidelines used for capital planning, issuance, usage and
distributions, including internal capital goals, quantitative or
qualitative guidelines for distributions, strategies for addressing
shortfalls and internal governance.
Internal baseline scenario would be defined as a scenario that
reflects the Enterprise's expectation of the economic and financial
outlook. Internal stress scenario would be defined as a scenario
designed by an Enterprise that stresses the specific vulnerabilities of
the Enterprise's risk profile and operations. Both scenarios would also
include expectations related to the Enterprise's capital adequacy and
financial condition.
The planning horizon would be defined as at least nine consecutive
quarters for the FHFA scenarios, consistent with DFAST, and at least
five years for the Internal scenarios, consistent with the Enterprise's
corporate forecasts. FHFA's proposal differs from the banking
framework, which has a nine-quarter horizon for both the regulator's
scenarios and bank's Internal scenarios. The proposal's longer-term
horizon for the Internal scenarios would better allow FHFA to assess
each Enterprise's plan to rebuild capital to come into compliance with
the ERCF.
An Enterprise must include pro forma estimates of its minimum
regulatory capital ratios in its capital plan. If FHFA were to adopt
additional or different minimum regulatory capital ratios in the
future, an Enterprise would be required to incorporate these minimum
capital ratios into its capital plan as they come into effect and
reflect them in its planning horizon.
In connection with its submission of a capital plan to FHFA, an
Enterprise would be required to provide certain data to FHFA. To the
greatest extent possible, the data templates, and any other data
requests, would be designed to minimize the burden on the Enterprise
and to avoid duplication. Upon the request of FHFA, an Enterprise must
provide the Agency with information on its financial condition and
capital, structure, amount and risk characteristics of on- and off-
balance sheet exposures, risk management policies and procedures,
liquidity profile, models used for stress scenario analysis, and any
other relevant qualitative or quantitative information requested by the
Agency to facilitate review of the Enterprise's capital plan.
C. FHFA Review of a Capital Plan
The proposal provides that FHFA would consider the following
factors in reviewing an Enterprise's capital plan:
1. The comprehensiveness of the capital plan, including the extent
to which the underlying analysis addresses potential risks from
activities across the Enterprise and the Enterprise's capital policy;
2. The reasonableness of the capital plan, assumptions and analysis
underlying the capital plan and robustness of its capital adequacy
process;
3. Relevant supervisory information about the Enterprise and its
subsidiaries;
4. The Enterprise's regulatory and financial reports, and
supporting data to allow for an analysis of the Enterprise's loss,
revenue and reserve projections;
5. The results of any stress tests conducted by the Enterprise or
FHFA; and
6. Other information required by FHFA or related to the
Enterprise's capital adequacy.
D. Resubmission of a Capital Plan
1. Under the proposal, an Enterprise would be required to update
and resubmit its capital plan to FHFA within 30 days if the Enterprise
determines there has been or will be a material change in the
Enterprise's risk profile, financial condition, or corporate structure
since the last submitted plan to FHFA, or if the Agency directs the
Enterprise in writing to revise and resubmit its plan, as necessary to
monitor risks to capital adequacy, for reasons including, but not
limited to: The capital plan is incomplete or the capital plan, or the
Enterprise's internal capital adequacy processes, contains material
weaknesses;
2. There has been or will likely be a material change in the
Enterprise's risk profile (including a material change in its business
strategy or any risk exposure), financial condition, or corporate
structure;
3. The Internal stress scenario(s) in the capital plan are not
appropriate for the Enterprise's business model and portfolios, or
changes in financial markets or the macro-economic outlook that could
have a material impact on an Enterprise's risk profile and financial
condition require the use of updated scenarios.
FHFA may extend the 30-day resubmission period for up to an
additional 60 days, or such longer period as the Agency determines
appropriate.
If a capital plan is resubmitted by an Enterprise, FHFA will
provide notice within 75 days, unless extended, on whether it will
recalculate the stress capital buffer. Unless otherwise determined by
FHFA, the Agency will provide notice to the Enterprise of the new
buffer within 90 days of its decision to recalculate the buffer.
[[Page 73190]]
III. Approval Requirements for Certain Capital Actions and Post Notice
Requirement
An Enterprise must receive prior approval from FHFA before making a
capital distribution (excluding any capital distribution arising from
the issuance of a capital instrument eligible for inclusion in the
numerator of a regulatory capital ratio) if the capital distribution
would occur after an event requiring the resubmission of a capital
plan.
In making a request for a capital distribution under this part of
the proposal, the Enterprise must discuss any changes to the capital
plan since it was last submitted to FHFA, provide the purpose of the
transaction, and a description of the proposed capital distribution.
The Agency may request additional information, which may include an
assessment of the Enterprise's capital adequacy under a severely
adverse scenario, a revised capital plan, and supporting data.
FHFA will act on requests for prior approval within 30 days of
receiving all the required information. If the transaction is not
approved, the Agency will notify the Enterprise of the reasons for its
decision, and the Enterprise will have 15 days to submit a request for
a hearing. If after considering the request FHFA decides to grant a
hearing, it will be held within 30 days of FHFA's receipt of the
request for a hearing. The Agency will give written notice to the
Enterprise of its decision within 60 days of the conclusion of the
hearing. FHFA may decide to extend the periods for the hearing and for
rendering its decision.
An Enterprise must notify FHFA within 15 days of making a capital
distribution if it was approved under a request for prior approval
(when a plan needs to be resubmitted), or if the distribution will
exceed the dollar amount of the Enterprise's final planned capital
distributions, as measured on an aggregate basis beginning in the
fourth quarter of the planning horizon through the quarter at issue.
IV. Stress Capital Buffer
A. Determination of the Stress Capital Buffer
The proposal incorporates the stress capital buffer from the ERCF
into the capital planning process. The buffer is determined by FHFA,
and the calculation is based on the results of a supervisory stress
test, subject to a floor of 0.75 percent of the Enterprise's adjusted
total assets as of the last day of the previous calendar quarter.
However, until such time as the Agency develops its supervisory stress
test, or in any year that FHFA does not determine the stress capital
buffer, the buffer is equal to 0.75 percent of an Enterprise's adjusted
total assets, as of the last day of the previous calendar quarter.
The proposal has changed the calculation method slightly by
considering an Enterprise's planned common stock dividends for the
fourth through seventh quarters of the planning horizon rather than the
ERCF direction to use each of the nine quarters of the planning
horizon. This change is consistent with the Board's recent amendments
to the banking rule, which uses four quarters of planned common stock
dividends.
FHFA will provide the Enterprise with notice of its stress capital
buffer and explanation of the results of the supervisory stress test by
August 15 of each year, unless otherwise determined by the Agency.
Within two business days of receiving its stress capital buffer, an
Enterprise must adjust its planned capital distributions for the fourth
through seventh quarters of the planning horizon to be consistent with
effective capital distribution limitations assuming the stress capital
buffer provided by the Agency, in place of any stress capital buffer
currently in effect.
An Enterprise may request reconsideration of its stress capital
buffer by submitting a written request within 15 days of receipt of its
buffer from FHFA. The Enterprise may also request an informal hearing.
The hearing, if granted by the Agency, will take place within 30 days
of FHFA's receipt of the request for a hearing. FHFA will provide its
decision within 30 days of receiving the written reconsideration
request or within 30 days of the conclusion of the hearing. The time
period for the hearing and for providing the decision may be extended
by the Agency.
If the Enterprise does not request reconsideration, FHFA will
provide the Enterprise with its final stress capital buffer by August
31 and the buffer will be effective on October 1, unless otherwise
determined by the Agency.
B. Conforming Amendments to the ERCF
Since the proposal incorporates the stress capital buffer into the
capital planning process, it is necessary for FHFA to make conforming
amendments to the ERCF. The stress capital buffer determination in the
ERCF would be replaced with a reference to the determination of the
buffer in the capital planning rule. The stress capital buffer would
remain as a component of the capital conservation buffer in the ERCF.
FHFA solicits comments on all aspects of the proposal.
V. Regulatory Analyses
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that
a regulation that has a significant economic impact on a substantial
number of small entities, small businesses, or small organizations must
include an initial regulatory flexibility analysis describing the
regulation's impact on small entities. FHFA need not undertake such an
analysis if FHFA has certified that the regulation will not have a
significant economic impact on a substantial number of small entities.
FHFA has considered the impact of the proposed rule under the
Regulatory Flexibility Act. FHFA certifies that the proposed rule, if
adopted as a final rule, would not have a significant economic impact
on a substantial number of small entities because the proposed rule is
applicable only to the Enterprises, which are not small entities for
purposes of the Regulatory Flexibility Act.
B. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq.) requires
that regulations involving the collection of information receive
clearance from the Office of Management and Budget (OMB). The proposed
rule contains no such collection of information requiring OMB approval
under the PRA. Therefore, no information has been submitted to OMB for
review.
List of Subjects in 12 CFR Part 1240
Capital, Credit, Enterprise, Investments, Reporting and
recordkeeping requirements.
Authority and Issuance
Accordingly, for the reasons stated in the preamble, under the
authority of 12 U.S.C. 4511, 4513, 4513b, 4514, 4515-17, 4526, 4611-12,
4631-36, FHFA proposes to amend part 1240 of title 12 of the Code of
Federal Regulations as follows:
Chapter XII--Federal Housing Finance Agency
Subchapter C--Enterprises
PART 1240--CAPITAL ADEQUACY OF ENTERPRISES
0
1. The authority citation for part 1240 is revised to read as follows:
Authority: 12 U.S.C. 4511, 4513, 4513b, 4514, 4515, 4517, 4526,
4611-12, 4631-36.
0
2. Amend Sec. 1240.11 by revising paragraph (a)(7) to read as follows:
[[Page 73191]]
Sec. 1240.11 Capital conservation buffer and leverage buffer.
(a) * * *
(7) Stress capital buffer. (i) The stress capital buffer for an
Enterprise is the stress capital buffer determined under Sec. 1240.500
except as provided in paragraph (a)(7)(ii) of this section.
(ii) If an Enterprise has not yet received a stress capital buffer
requirement per paragraph (a)(7)(i) of this section, its stress capital
buffer for purposes of this part is 0.75 percent of the Enterprise's
adjusted total assets, as of the last day of the previous calendar
quarter.
* * * * *
0
3. Add subpart H to read as follows:
Subpart H--Capital Planning and Stress Capital Buffer Determination
Sec. 1240.500 Capital planning and stress capital buffer
determination.
(a) Purpose. This section establishes capital planning and prior
notice and approval requirements for capital distributions by the
Enterprises. This section also establishes FHFA's process for
determining the stress capital buffer applicable to the Enterprises.
(b) Scope and reservation of authority--(1) Applicability. This
section applies to the Enterprises.
(2) Reservation of authority. Nothing in this section shall limit
the authority of FHFA to issue or enforce a capital directive or take
any other supervisory or enforcement action, including an action to
address unsafe or unsound practices or conditions or violations of law.
(c) Definitions. For purposes of this section, the following
definitions apply:
Adjusted total assets has the same meaning as under subpart A of
this part.
Advanced approaches means the risk-weighted assets calculation
methodologies as set forth in subpart E of this part.
Capital action means any issuance of a debt or equity capital
instrument, any capital distribution, and any similar action that FHFA
determines could impact an Enterprise's consolidated capital.
Capital distribution means a redemption or repurchase of any debt
or equity capital instrument, a payment of common or preferred stock
dividends, a payment that may be temporarily or permanently suspended
by the issuer on any instrument that is eligible for inclusion in the
numerator of any minimum regulatory capital ratio, and any similar
transaction that FHFA determines to be in substance a distribution of
capital.
Capital plan means a written presentation of an Enterprise's
capital planning strategies and capital adequacy process that includes
the mandatory elements set forth in paragraph (d)(2) of this section.
Capital plan cycle means the period beginning on January 1 of a
calendar year and ending on December 31 of that year.
Capital policy means an Enterprise's written principles and
guidelines used for capital planning, capital issuance, capital usage
and distributions, including internal capital goals; the quantitative
or qualitative guidelines for capital distributions; the strategies for
addressing potential capital shortfalls; and the internal governance
procedures around capital policy principles and guidelines.
Common equity tier 1 capital has the same meaning as under subpart
C of this part.
Effective capital distribution limitations means any limitations on
capital distributions established by FHFA by order or regulation,
provided that, for any limitations based on risk-weighted assets, such
limitations must be calculated using the standardized approach, as set
forth in subpart D of this part.
Final planned capital distributions means the planned capital
distributions included in a capital plan that include the adjustments
made pursuant to paragraph (g) of this section, if any.
Internal baseline scenario means a scenario that reflects the
Enterprise's expectation of the economic and financial outlook,
including expectations related to the Enterprise's capital adequacy and
financial condition.
Internal stress scenario means a scenario designed by an Enterprise
that stresses the specific vulnerabilities of the Enterprise's risk
profile and operations, including those related to the Enterprise's
capital adequacy and financial condition.
Planning horizon means the period of at least nine consecutive
quarters for the FHFA scenarios and at least five years for the
Internal scenarios, beginning with the quarter preceding the quarter in
which the Enterprise submits its capital plan, over which the relevant
projections extend, unless otherwise directed by FHFA.
Regulatory capital ratio means a capital ratio for which FHFA has
established minimum requirements for the Enterprise by regulation or
order, including, as applicable, the Enterprise's regulatory capital
ratios calculated under subpart B of this part; except that the
Enterprise shall not use the advanced approaches to calculate its
regulatory capital ratios.
Severely adverse scenario has the same meaning as under 12 CFR part
1238.
Stability capital buffer has the same meaning as under subpart G of
this part.
Stress capital buffer means the amount calculated under paragraph
(e) of this section.
Supervisory stress test means a stress test conducted by FHFA using
a severely adverse scenario and the assumptions contained in 12 CFR
part 1238.
(d) Capital planning requirements and procedures--(1) Annual
capital planning. (i) An Enterprise must develop and maintain a capital
plan.
(ii) An Enterprise must submit its complete capital plan to FHFA by
May 20 of each calendar year, or such later date as directed by FHFA.
(iii) The Enterprise's board of directors or a designated committee
thereof must at least annually and prior to submission of the capital
plan under paragraph (d)(1)(ii) of this section:
(A) Review the robustness of the Enterprise's process for assessing
capital adequacy;
(B) Ensure that any deficiencies in the Enterprise's process for
assessing capital adequacy are appropriately remedied; and
(C) Approve the Enterprise's capital plan.
(2) Mandatory elements of capital plan. A capital plan must contain
at least the following elements:
(i) An assessment of the expected uses and sources of capital over
the planning horizon that reflects the Enterprise's size, complexity,
risk profile, and scope of operations, assuming both expected and
stressful conditions, including:
(A) Estimates of projected revenues, expenses, losses, reserves,
and pro forma capital levels, including regulatory capital ratios, and
any additional capital measures deemed relevant by the Enterprise, over
the planning horizon under a range of scenarios, including the Internal
baseline scenario and at least one Internal stress scenario, as well as
any additional scenarios that FHFA may provide the Enterprise after
giving notice to the Enterprise;
(B) A discussion of the results of any stress test required by law
or regulation, and an explanation of how the capital plan takes these
results into account; and
(C) A description of all planned capital actions over the planning
horizon. Planned capital actions must be consistent with any effective
capital distribution limitations, except as may be adjusted pursuant to
paragraph (g) of this section. In determining whether an
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Enterprise's planned capital distributions are consistent with
effective capital distribution limitations, an Enterprise must assume
that:
(1) Any countercyclical capital buffer amount currently applicable
to the Enterprise remains at the same level, except that the Enterprise
must reflect any increases or decreases in the countercyclical capital
buffer amount that have been announced by FHFA at the times indicated
by FHFA's announcement for when such increases or decreases will take
effect; and
(2) Any stability capital buffer currently applicable to the
Enterprise when the capital plan is submitted remains at the same
level, except that the Enterprise must reflect any increase in its
stability capital buffer pursuant to Sec. 1240.400(c)(1), beginning in
the fifth quarter of the planning horizon.
(ii) A detailed description of the Enterprise's process for
assessing capital adequacy, including:
(A) A discussion of how the Enterprise will, under expected and
stressful conditions, maintain capital commensurate with its risks, and
maintain capital above the regulatory capital ratios;
(B) A discussion of how the Enterprise will, under expected and
stressful conditions, maintain sufficient capital to continue its
operations by maintaining ready access to funding, meeting its
obligations to creditors and other counterparties, and continuing to
serve as a credit intermediary;
(iii) The Enterprise's capital policy; and
(iv) A discussion of any expected changes to the Enterprise's
business plan that are likely to have a material impact on the
Enterprise's capital adequacy or liquidity.
(3) Data collection. Upon the request of FHFA, the Enterprise shall
provide FHFA with information regarding:
(i) The Enterprise's financial condition, including its capital;
(ii) The Enterprise's structure;
(iii) Amount and risk characteristics of the Enterprise's on- and
off-balance sheet exposures, including exposures within the
Enterprise's trading account, other trading-related exposures (such as
counterparty-credit risk exposures) or other items sensitive to changes
in market factors, including, as appropriate, information about the
sensitivity of positions to changes in market rates and prices;
(iv) The Enterprise's relevant policies and procedures, including
risk management policies and procedures;
(v) The Enterprise's liquidity profile and management;
(vi) The loss, revenue, and expense estimation models used by the
Enterprise for stress scenario analysis, including supporting
documentation regarding each model's development and validation; and
(vii) Any other relevant qualitative or quantitative information
requested by FHFA to facilitate review of the Enterprise's capital plan
under this section.
(4) Resubmission of a capital plan. (i) An Enterprise must update
and resubmit its capital plan to FHFA within 30 calendar days of the
occurrence of one of the following events:
(A) The Enterprise determines there has been or will be a material
change in the Enterprise's risk profile, financial condition, or
corporate structure since the Enterprise last submitted the capital
plan to FHFA; or
(B) FHFA instructs the Enterprise in writing to revise and resubmit
its capital plan, as necessary to monitor risks to capital adequacy,
for reasons including, but not limited to:
(1) The capital plan is incomplete or the capital plan, or the
Enterprise's internal capital adequacy process, contains material
weaknesses;
(2) There has been, or will likely be, a material change in the
Enterprise's risk profile (including a material change in its business
strategy or any risk exposure), financial condition, or corporate
structure; or
(3) The Internal stress scenario(s) are not appropriate for the
Enterprise's business model and portfolios, or changes in financial
markets or the macro-economic outlook that could have a material impact
on an Enterprise's risk profile and financial condition require the use
of updated scenarios; or
(ii) FHFA may extend the 30-day period in paragraph (d)(4)(i) of
this section for up to an additional 60 calendar days, or such longer
period as FHFA determines appropriate.
(iii) Any updated capital plan must satisfy all the requirements of
this section; however, an Enterprise may continue to rely on
information submitted as part of a previously submitted capital plan to
the extent that the information remains accurate and appropriate.
(5) Confidential treatment of information submitted. The
confidentiality of information submitted to FHFA under this section and
related materials shall be determined in accordance with applicable
exemptions under the Freedom of Information Act (5 U.S.C. 552(b)) and
FHFA's rule in 12 CFR part 1214--Availability of Non-Public
Information.
(e) Calculation of the stress capital buffer--(1) General. FHFA
will determine the stress capital buffer that applies under Sec.
1240.11 pursuant to this paragraph (e). FHFA will calculate the
Enterprise's stress capital buffer requirement annually.
(2) Stress capital buffer calculation. An Enterprise's stress
capital buffer is equal to the Enterprise's adjusted total assets, as
of the last day of the previous calendar quarter, multiplied by the
greater of:
(i) The following calculation:
(A) The ratio of an Enterprise's common equity tier 1 capital to
adjusted total assets, as of the final quarter of the previous capital
plan cycle, unless otherwise determined by FHFA; minus
(B) The lowest projected ratio of the Enterprise's common equity
tier 1 capital to adjusted total assets, in any quarter of the planning
horizon under a supervisory stress test; plus
(C) The ratio of:
(1) The sum of the Enterprise's planned common stock dividends
(expressed as a dollar amount) for each of the fourth through seventh
quarters of the planning horizon; to
(2) The adjusted total assets of the Enterprise in the quarter in
which the Enterprise had its lowest projected ratio of common equity
tier 1 capital to adjusted total assets, in any quarter of the planning
horizon under a supervisory stress test; and
(ii) 0.75 percent.
(3) Recalculation of stress capital buffer. If an Enterprise
resubmits its capital plan pursuant to paragraph (d)(4) of this
section, FHFA may recalculate the Enterprise's stress capital buffer.
FHFA will provide notice of whether the Enterprise's stress capital
buffer will be recalculated within 75 calendar days after the date on
which the capital plan is resubmitted, unless FHFA provides notice to
the Enterprise that it is extending the time period.
(f) Review of capital plans by FHFA. FHFA will consider the
following factors in reviewing an Enterprise's capital plan:
(1) The comprehensiveness of the capital plan, including the extent
to which the analysis underlying the capital plan captures and
addresses potential risks stemming from activities across the
Enterprise and the Enterprise's capital policy;
(2) The reasonableness of the Enterprise's capital plan, the
assumptions and analysis underlying the capital plan, and the
robustness of its capital adequacy process;
[[Page 73193]]
(3) Relevant supervisory information about the Enterprise and its
subsidiaries;
(4) The Enterprise's regulatory and financial reports, as well as
supporting data that would allow for an analysis of the Enterprise's
loss, revenue, and reserve projections;
(5) The results of any stress tests conducted by the Enterprise or
FHFA; and
(6) Other information requested or required by FHFA, as well as any
other information relevant, or related, to the Enterprise's capital
adequacy.
(g) FHFA notice of stress capital buffer; final planned capital
distributions--(1) Notice. FHFA will provide an Enterprise with notice
of its stress capital buffer and an explanation of the results of the
supervisory stress test. Unless otherwise determined by FHFA, notice
will be provided by August 15 of the calendar year in which the capital
plan was submitted pursuant to paragraph (d)(1)(ii) of this section or
within 90 calendar days of receiving notice that FHFA will recalculate
the Enterprise's stress capital buffer pursuant to paragraph (e)(3) of
this section.
(2) Response to notice--(i) Request for reconsideration of stress
capital buffer. An Enterprise may request reconsideration of a stress
capital buffer provided under paragraph (g)(1) of this section. To
request reconsideration of a stress capital buffer, an Enterprise must
submit to FHFA a request pursuant to paragraph (h) of this section.
(ii) Adjustments to planned capital distributions. Within two
business days of receipt of notice of a stress capital buffer under
paragraph (g)(1) or (h)(5) of this section, as applicable, an
Enterprise must:
(A) Determine whether the planned capital distributions for the
fourth through seventh quarters of the planning horizon under the
Internal baseline scenario would be consistent with effective capital
distribution limitations assuming the stress capital buffer provided by
FHFA under paragraph (g)(1) or (h)(5) of this section, as applicable,
in place of any stress capital buffer in effect; and
(1) If the planned capital distributions for the fourth through
seventh quarters of the planning horizon under the Internal baseline
scenario would not be consistent with effective capital distribution
limitations assuming the stress capital buffer provided by FHFA under
paragraph (g)(1) or (h)(5) of this section, as applicable, in place of
any stress capital buffer in effect, the Enterprise must adjust its
planned capital distributions such that its planned capital
distributions would be consistent with effective capital distribution
limitations assuming the stress capital buffer provided by FHFA under
paragraph (g)(1) or (h)(5) of this section, as applicable, in place of
any stress capital buffer in effect; or
(2) If the planned capital distributions for the fourth through
seventh quarters of the planning horizon under the Internal baseline
scenario would be consistent with effective capital distribution
limitations assuming the stress capital buffer provided by FHFA under
paragraph (g)(1) or (h)(5) of this section, as applicable, in place of
any stress capital buffer in effect, the Enterprise may adjust its
planned capital distributions. An Enterprise may not adjust its planned
capital distributions to be inconsistent with the effective capital
distribution limitations assuming the stress capital buffer provided by
FHFA under paragraph (g)(1) or (h)(5) of this section, as applicable;
and
(B) Notify FHFA of any adjustments made to planned capital
distributions for the fourth through seventh quarters of the planning
horizon under the Internal baseline scenario.
(3) Final planned capital distributions. FHFA will consider the
planned capital distributions, including any adjustments made pursuant
to paragraph (g)(2)(ii) of this section, to be the Enterprise's final
planned capital distributions on the later of:
(i) The expiration of the time for requesting reconsideration under
paragraph (i) of this section; and
(ii) The expiration of the time for adjusting planned capital
distributions pursuant to paragraph (g)(2)(ii) of this section.
(4) Effective date of final stress capital buffer. (i) FHFA will
provide an Enterprise with its final stress capital buffer and
confirmation of the Enterprise's final planned capital distributions by
August 31 of the calendar year that a capital plan was submitted
pursuant to paragraph (d)(1)(ii) of this section, unless otherwise
determined by FHFA. A stress capital buffer will not be considered
final so as to be agency action subject to judicial review under 5
U.S.C. 704 during the pendency of a request for reconsideration made
pursuant to paragraph (h) of this section or before the time for
requesting reconsideration has expired.
(ii) Unless otherwise determined by FHFA, an Enterprise's final
planned capital distributions and final stress capital buffer shall:
(A) Be effective on October 1 of the calendar year in which a
capital plan was submitted pursuant to paragraph (d)(1)(ii) of this
section; and
(B) Remain in effect until superseded.
(5) Publication. With respect to an Enterprise subject to this
section, FHFA may disclose publicly any or all of the following:
(i) The stress capital buffer provided to an Enterprise under
paragraph (g)(1) or (h)(5) of this section;
(ii) Adjustments made pursuant to paragraph (g)(2)(ii) of this
section;
(iii) A summary of the results of the supervisory stress test; and
(iv) Other information.
(h) Administrative remedies; request for reconsideration. The
following requirements and procedures apply to any request under this
paragraph (h):
(1) General. To request reconsideration of a stress capital buffer,
provided under paragraph (g) of this section, an Enterprise must submit
a written request for reconsideration.
(2) Timing of request. A request for reconsideration of a stress
capital buffer, provided under paragraph (g) of this section, must be
received within 15 calendar days of receipt of a notice of an
Enterprise's stress capital buffer.
(3) Contents of request. (i) A request for reconsideration must
include a detailed explanation of why reconsideration should be granted
(that is, why a stress capital buffer should be reconsidered). With
respect to any information that was not previously provided to FHFA in
the Enterprise's capital plan, the request should include an
explanation of why the information should be considered.
(ii) A request for reconsideration may include a request for an
informal hearing on the Enterprise's request for reconsideration.
(4) Hearing. (i) FHFA may, in its sole discretion, order an
informal hearing if FHFA finds that a hearing is appropriate or
necessary to resolve disputes regarding material issues of fact.
(ii) An informal hearing shall be held within 30 calendar days of a
request, if granted, provided that FHFA may extend this period upon
notice to the requesting party.
(5) Response to request. Within 30 calendar days of receipt of the
Enterprise's request for reconsideration of its stress capital buffer
submitted under paragraph (h)(2) of this section or within 30 days of
the conclusion of an informal hearing conducted under paragraph (h)(4)
of this section, FHFA will notify the Enterprise of its decision to
affirm or modify the Enterprise's stress capital buffer, provided that
FHFA may extend this period upon notice to the Enterprise.
[[Page 73194]]
(6) Distributions during the pendency of a request for
reconsideration. During the pendency of FHFA's decision under paragraph
(h)(5) of this section, the Enterprise may make capital distributions
that are consistent with effective distribution limitations, unless
prior approval is required under paragraph (i)(1) of this section.
(i) Approval requirements for certain capital actions--(1)
Circumstances requiring approval--resubmission of a capital plan.
Unless it receives prior approval pursuant to paragraph (i)(3) of this
section, an Enterprise may not make a capital distribution (excluding
any capital distribution arising from the issuance of a capital
instrument eligible for inclusion in the numerator of a regulatory
capital ratio) if the capital distribution would occur after the
occurrence of an event requiring resubmission under paragraph
(d)(4)(i)(A) or (B) of this section.
(2) Contents of request. A request for a capital distribution under
this section must contain the following information:
(i) The Enterprise's capital plan or a discussion of changes to the
Enterprise's capital plan since it was last submitted to FHFA;
(ii) The purpose of the transaction;
(iii) A description of the capital distribution, including for
redemptions or repurchases of securities, the gross consideration to be
paid and the terms and sources of funding for the transaction, and for
dividends, the amount of the dividend(s); and
(iv) Any additional information requested by FHFA (which may
include, among other things, an assessment of the Enterprise's capital
adequacy under a severely adverse scenario, a revised capital plan, and
supporting data).
(3) Approval of certain capital distributions. (i) FHFA will act on
a request for prior approval of a capital distribution within 30
calendar days after the receipt of all the information required under
paragraph (i)(2) of this section.
(ii) In acting on a request for prior approval of a capital
distribution, FHFA will apply the considerations and principles in
paragraph (f) of this section, as appropriate. In addition, FHFA may
disapprove the transaction if the Enterprise does not provide all of
the information required to be submitted under paragraph (i)(2) of this
section.
(4) Disapproval and hearing. (i) FHFA will notify the Enterprise in
writing of the reasons for a decision to disapprove any proposed
capital distribution. Within 15 calendar days after receipt of a
disapproval by FHFA, the Enterprise may submit a written request for a
hearing.
(ii) FHFA may, in its sole discretion, order an informal hearing if
FHFA finds that a hearing is appropriate or necessary to resolve
disputes regarding material issues of fact. An informal hearing shall
be held within 30 calendar days of a request, if granted, provided that
FHFA may extend this period upon notice to the requesting party.
(iii) Written notice of the final decision of FHFA shall be given
to the Enterprise within 60 calendar days of the conclusion of any
informal hearing ordered by FHFA, provided that FHFA may extend this
period upon notice to the requesting party.
(iv) While FHFA's decision is pending and until such time as FHFA
approves the capital distribution at issue, the Enterprise may not make
such capital distribution.
(j) Post notice requirement. An Enterprise must notify FHFA within
15 days of making a capital distribution if:
(1) The capital distribution was approved pursuant to paragraph
(i)(3) of this section; or
(2) The dollar amount of the capital distribution will exceed the
dollar amount of the Enterprise's final planned capital distributions,
as measured on an aggregate basis beginning in the fourth quarter of
the planning horizon through the quarter at issue.
Sandra L. Thompson,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2021-27589 Filed 12-23-21; 8:45 am]
BILLING CODE 8070-01-P
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