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Fannie Mae's and Freddie Mac's voluntary initiatives: Lessons from banking

Listed author(s):
  • W. Scott Frame
  • Larry D. Wall

The federal government has an interest in the financial stability of Fannie Mae and Freddie Mac because of their importance to financial markets and the government's implicit guarantee of their liabilities. ; In October 2000 these two housing government-sponsored enterprises (GSEs) announced six voluntary initiatives. One initiative would enhance market discipline by having the GSEs issue subordinated debt. A second would boost liquidity by having the GSEs maintain a liquid securities portfolio. The other four initiatives would increase transparency by having the GSEs disclose their credit and interest rate losses under certain scenarios, obtain a credit rating for the government's exposure to loss, and disclose whether the GSEs comply with certain capital adequacy standards. ; This article evaluates the initiatives from the perspective of current banking standards. The analysis suggests that the initiatives are beneficial but could be made more effective. The authors point out that the contribution of the subordinated debt initiative depends largely on whether investors believe the implicit guarantee extends to subordinated debtholders. The need for the liquidity initiative has not been established, the authors conclude, and can be criticized as allowing the GSEs to earn a credit spread. The most important of the disclosure initiatives, the one for interest rate risk, will provide some new information but could be more informative if it summarized a wider set of interest rate scenarios.

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Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (2002)
Issue (Month): Q1 ()
Pages: 45-59

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Handle: RePEc:fip:fedaer:y:2002:i:q1:p:45-59:n:v.87no.1
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  1. Robert A. Eisenbeis & Larry D. Wall, 2002. "Reforming deposit insurance and FDICIA," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 1-16.
  2. Richard S. Carnell, 2001. "Federal Deposit Insurance versus federal sponsorship of Fannie Mae and Freddie Mac: the structure of subsidy," Proceedings 738, Federal Reserve Bank of Chicago.
  3. Hugh Cohen, 1993. "Beyond duration: measuring interest rate exposure," Economic Review, Federal Reserve Bank of Atlanta, issue Mar, pages 23-31.
  4. W. Scott Frame & Larry D. Wall, 2002. "Financing housing through government-sponsored enterprises," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 29-43.
  5. George J. Benston & George G. Kaufman, 1997. "FDICIA after Five Years," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 139-158, Summer.
  6. Douglas D. Evanoff & Larry D. Wall, 2000. "Subordinated debt as bank capital: a proposal for regulatory reform," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 40-53.
  7. Amihud, Yakov & Mendelson, Haim, 1991. " Liquidity, Maturity, and the Yields on U.S. Treasury Securities," Journal of Finance, American Finance Association, vol. 46(4), pages 1411-1425, September.
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