only $36.4 Billion Needed for BUFFER ! According to the stress test approach used by the banks,
capital should be enough to
(1) absorb the severely adverse scenario losses, plus
(2) have a remaining residual amount of capital adequate to maintain market confidence after the stress event (known as the “going-concern buffer,” the size of which is very much a judgment call by the regulators).
We also know that Freddie Mac reported in its 2018 yearend financial results press release that the amount of capital required by the Conservatorship Capital Framework (CCF) – which has the same capital formulae as the risk-based portion of the proposed capital rule and is currently used by the two GSEs for risk-reward decision-making while they are in conservatorship – was $56.6 billion for the fourth quarter of 2018, when Freddie Mac’s total assets were $2.1 trillion.
So, we can do the obvious calculations:
TABLE 2
Do we then consider the residual $36.4 billion “implied going-concern buffer” enough to maintain market confidence ?
Given that it is more than double the severely adverse scenario stress test loss, there is a good argument it does. But as the FHFA has never formally and publicly made the judgment call of how to calculate a total going-concern buffer for the GSEs, we can only posit that it is indeed adequate.
Regardless of the specifics of what the FHFA comes out with in its capital rule, there is no denying that the stress test results are a credible reminder how de-risked the GSEs are today versus just five years ago.
The stress loss, at just 0.8 percent of assets, is a small amount (and would only be 0.4 percent if no DTA write-down is assumed), especially when compared to the 3 to 5 percent loss ratio range that I have heard policymakers most commonly discuss as being generated during the financial crisis.
It’s a quiet but major policy success that should get more attention in Washington.
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