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FDIC Finds Risk Exposure to GSE Debt Manageable

MARCH 5, 2004


FDIC Finds Risk Exposure to GSE Debt Manageable

An FDIC study has found that the banking industry is well positioned to absorb the affects of a widening of yield spreads on debt issued by government sponsored enterprises (GSEs) and the elimination of explicit treatment of the debt in risk-based capital regulations.

The FDIC took a look at the issue in light of the recent heavy scrutiny of Fannie Mae and Freddie Mac that has called attention to the large concentrations of GSE debt held by banks and thrifts. Some have raised concerns about the impact on debt holders should the GSEs lose their implied government guarantee and GSE status.

The FDIC estimated how the value of GSE securities held by banks and thrifts might be affected if the market perception of the GSEs' implicit government guarantee were instantaneously eliminated. The FDIC looked at the treatment of GSE securities in capital rules and looked at the sensitivity of industry capital ratios to potential changes in the risk weights for GSE securities. The FDIC also looked at other potential sources of risk to the banking industry and the longer-term implications of changes to GSE status.

As of September 30, 2003, the FDIC estimated that the initial effect of eliminating an implicit guarantee would reduce the value of GSE securities held by banks by $12 billion or 1.1%. The industry total risk-based capital ratio would fall by 47 basis points or 3.6%. The Tier 1 capital and leverage ratios would decline by the same or less. The FDIC concluded that the effect of eliminating any implicit guarantee on the liquidity and regulatory capital levels of most banks and thrifts would be manageable.

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