Government-Sponsored Enterprises:

A Framework for Limiting the Government's Exposure to Risks

GGD-91-90: Published: May 22, 1991. Publicly Released: May 22, 1991.

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Pursuant to a legislative requirement, GAO reviewed the risks undertaken by government-sponsored enterprises (GSE) in order to propose: (1) appropriate regulatory authorities for GSE federal regulators; (2) a regulatory structure to administer GSE oversight; and (3) capital standards to adequately protect the government's interest in GSE.

GAO found that: (1) the Department of Housing and Urban Development (HUD) lacked the authority to set capital rules for the Federal National Mortgage Association and the Federal Home Loan Mortgage Association; (2) the Student Loan Marketing Association lacked federal oversight of its financial activities and a minimum capital requirement; (3) the Farm Credit Administration lacked specific authority to set capital standards for the Federal Agricultural Mortgage Corporation (Farmer Mac); and (4) the Federal Home Loan Bank System's statutory capital rules used a capital-to-outstanding debt ratio that did not consider risks of off-balance activities or the relative riskiness of various bank assets. GAO believes that in order to overcome those shortcomings: (1) GSE regulators need authority to set rules, monitor financial performance and compliance with regulations, set minimum capital requirements, enforce regulations by imposing appropriate sanctions, and levy assessments to cover supervisory costs; (2) GSE regulatory authorities should be similar to those for banks, with federal oversight supplementing corporate guidance; (3) GSE should be regulated by a single independent regulatory body overseen by an independent board of directors that is prominent in government and has the organizational capacity to protect the government's interest in accomplishing GSE public purposes; (4) minimum capital standards should take into account the amount of capital needed to withstand stressful economic environments, and enterprise size so that reserves can cover management, operations, and business risks; and (5) Farm Credit Banks and Banks for Cooperatives should continue to follow bank-like, risk-based capital rules since they compete directly with commercial banks.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The Housing and Community Development Act of 1992 establishes the Office of Federal Housing Enterprise Oversight to accomplish the objectives of the recommendation.

    Matter: To correct the inadequacies in the federal government's oversight of GSE, to promote safety and soundness, and to ensure fulfillment of statutory purposes, Congress should establish a Federal Enterprise Regulatory Board composed of three voting members and three nonvoting members. The voting members should include a full-time chairperson appointed by the President and confirmed by the Senate, the Secretary of the Treasury, and the Chairman of the Board of Governors of the Federal Reserve System. The nonvoting members should be the Secretaries of Agriculture, Education, and HUD.

  2. Status: Closed - Implemented

    Comments: Public Law 102-550 established a Director in the Office of Federal Housing Enterprise Oversight, which will accomplish the objectives of the recommendation.

    Matter: To correct the inadequacies in the federal government's oversight of GSE, to promote safety and soundness, and to ensure fulfillment of statutory purposes, Congress should designate the chairperson of the Federal Enterprise Regulatory Board as chief executive officer to administer the day-to-day operations of the regulator.

  3. Status: Closed - Implemented

    Comments: Public Law 102-550 provides the Office of Federal Housing Enterprise Oversight with authority and responsibility that achieves the objectives of the recommendation.

    Matter: To correct the inadequacies in the federal government's oversight of GSE, to promote safety and soundness, and to ensure fulfillment of statutory purposes, Congress should provide the GSE regulator with the authority and responsibility to: (1) establish rules governing GSE; (2) monitor GSE activities and condition; (3) set capital requirements for GSE based on the risks they undertake; (4) levy assessments on GSE to cover the costs of regulation; and (5) enforce all applicable statutes and regulations. Enforcement authorities should track those available to bank and thrift regulators and their use should be tied to certain prespecified conditions.

  4. Status: Closed - Implemented

    Comments: Public Law 102-550 requires risk-based capital levels that accomplish the objectives of the recommendation.

    Matter: Congress should direct the GSE regulator to establish minimum required capital standards for GSE that are based on the risks they undertake. The standards should include the sum of capital determined by: (1) empirically based tests of GSE capital adequacy to withstand credit and interest rate risk in stressful economic environments; and (2) a leverage ratio that provides capital for nonmeasurable risks calculated on the basis of on- and off-balance-sheet at-risk assets.

 

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