What do you think about the time frames the twins are asking for as it relates to our earlier discussion today about the time FHFA will allow it to occur (from pg. 66-68, Freddie comment letter):
"As currently proposed, FHFA has provided two options for compliance with the
Proposal’s capital requirements. First, the compliance date could occur automatically as the later
of one year from publication of the final rule or the date of an Enterprise’s exit from
conservatorship. At that point, full compliance with the minimum and buffer requirements
would be expected. Alternatively, the Proposal would grant FHFA the discretion to create a
“deferral period” for compliance with the capital requirements.174 Nevertheless, during a
deferral period, an Enterprise would be subject to capital restrictions—the Proposal would
require that the Enterprise’s PCCBA be equal to required CET1 capital plus required PCCBA
and that the PLBA be equal to 4% of the Enterprise’s ATA.175 While this approach would
effectively waive the capital requirements during the deferral period, an Enterprise still would be
subject to restrictions on dividend distributions and executive compensation if the Enterprise has
only achieved actual capital amounts within the buffer at the time of the deferral order.
This deferral buffer concept is not sufficiently flexible and does not provide a set
runway for compliance. In order to provide a more certain path for the Enterprises to achieve
compliance and more flexibility for actions along that path, we recommend the following:
• At the compliance date set forth in proposed § 1240.4(c) (the later of one year from
publication of the final rule or the date of the Enterprise’s exit from conservatorship),
apply to the Enterprises a set of minimum risk-based ratios that are significantly
lower than the Enterprise’s fully phased-in amounts. This would allow the
Enterprises to exit conservatorship with a smaller required capital amount, without
being immediately out of compliance or subject to a buffer restriction.
• Phase in both the minima and the buffers over a five-year transition period where
each of the minima and buffers would increase (e.g., on January 1 of each year) to a
new minimum and buffer amount established on a straight-line basis.
• Similar to the proposed ability to determine a deferral period, the final rule would
have a “reservation of authority” provision that would allow FHFA to determine that
any element of the phase-in schedule described above could be waived, postponed or
accelerated with appropriate notice to the Enterprise.
If adjustments to executive compensation are necessary, they could be subject to
separate agreements between FHFA and the Enterprise or addressed through
FHFA’s regulatory authority related to executive compensation.
176
Payment of dividends and related distributions could be subject to certain
extraordinary recapitalization requirements imposed if the Enterprise were to exhibit weakness or an inability to achieve appropriate capital levels during the
phase-in.
? While we do not believe that a corrective plan or a cease-and-desist order
(as described in the proposed § 1240.4(d)(2)(iii)) is a necessary
pre-requisite for exiting conservatorship, those tools, of course, would be
available to FHFA.
Graduated phase-ins have been a significant feature of all material rulemakings by
the banking agencies in relation to capital and the Basel framework.
177 The U.S. banking
agencies implemented transition periods for each of the capital requirements in their final rule
implementing the Basel Committee’s Basel III reforms in 2013 over a period of five years.178
Recently, the banking agencies implemented a three-year phase-in period for banking
organizations for compliance with CECL,179 and the Basel Committee introduced a five-year
transition period to phase in requirements of Basel IV beginning in 2022 (both of which have
been extended recently due to COVID-19).180 Our recommended five-year phase-in period is
similar to phase-in periods for complex capital requirements and would provide the Enterprises a
suitable amount of time to reach full capitalization from private sources of capital without having
to navigate either compliance failures or buffer restrictions.
The purpose of the phase-in would be to allow an Enterprise to build up its capital
from a low level without immediately being subject to penalties on dividends and executive
compensation. It is unlikely that the Enterprises could exit conservatorship in the near future at
full capitalization. Private investors would have more confidence in supporting the Enterprises’
capital-raising efforts if they understand that they are investing in attractive instruments issuedby entities that are able to operate “business-as-usual” and will have the ability to provide returns
and allow participation in the upside of the Enterprises’ businesses. Therefore, to help the
Enterprises reach full capitalization, the transition period should be structured to allow a gradual
build-up of capital without restricting dividend payments on that issued capital. This would be
similar to the phase-in of the Basel III reforms.
If FHFA were to retain the deferral and buffers concept rather than phasing in the
minimum and buffer requirements over time, dividend restrictions should be waived in any
deferral order, unless the Enterprise evidences weakness or is at risk of not exiting the deferral
period fully capitalized. This would be necessary to attract investors. As another alternative, the
deferral order could make the buffers more flexible by phasing in the “top” of the buffer over a
period of time. For example, CET1 plus PCCBA could begin at a lower number and gradually
phase in to reach the maximum."
