Lapas attēli
PDF
ePub

Chairman SHELBY. Would resolution procedures along the lines of those held by FDIC to form bridge banks or to deal with systemic risk issues also be advisable for a GSE regulator?

Mr. WALKER. We believe it is important for you to look at what types of authorities and tools other entities have, such as this, and really the question in our view would be: Why shouldn't they have it? In other words, the presumption would be that they should have these tools

Chairman SHELBY. If you are going to have a regulator, you need a regulator. Is that correct?

Mr. WALKER. Right.

Chairman SHELBY. The last question I am going to touch on— we have a lot of other people here-is the impact of earnings per share as a corporate goal. Doesn't every public company focus on earnings per share?

Mr. WALKER. They clearly do, Mr. Chairman.

Chairman SHELBY. Does this attention to earnings per share measurements impact the holdings in the GSE portfolios, in your judgment?

Mr. WALKER. It can. As you know, there are certain holdings that can enhance value and potentially moderate risk, and such investments have the potential to do that. And I believe, Mr. Chairman, that one of the challenges that we have, not just with GSE's but in corporate America, is too much focus on short-term earnings rather than earnings over the longer-term, along with sustainable earnings, and quality earnings.

Chairman SHELBY. Senator Reed.

Senator REED. Thank you very much, Mr. Chairman.
Thank you, Mr. Walker, for your testimony.

Back in 1997, the GAO issued a report, "Advantages and Disadvantages of Creating a Single Housing GSE Regulator." It rolls right off the tongue, a very good title. "Our analysis of different regulatory structures indicate that an independent, arm's-length, stand-alone regulatory body headed by a board would best fit our criteria for effective regulatory agencies." Is that still your position today?

Mr. WALKER. We do believe there needs to be a single regulator to address safety, soundness, and mission considerations. I have now offered a possible hybrid model that we did not put forward in 1997 that I think the Congress should consider, an executive director but possibly a coordinating board involved with appropriate individuals to be able to help make sure that there is effective coordination of mission, safety, and soundness considerations.

Senator REED. What has changed since 1997 that would prompt this hybrid proposal?

Mr. WALKER. David M. Walker has become Comptroller General of the United States and has prior experience in dealing with entities that had these types of structures. It has worked pretty well. For example-and, by the way, the financial condition of the entity that I am going to talk about is not a model that we want to follow, but the Pension Benefit Guaranty Corporation has an executive director and has a board of directors comprised of the Secretary of Labor, the Secretary of Treasury, and the Secretary of Commerce. One of the reasons that that model was chosen was to be able to

provide the executive director with the responsibility and authority to run this independent agency in a way to protect the public interest and to serve the mission purpose of the agency, at the same point in time recognizing that each of those three Cabinet-level Departments had an interest in the activities of the PBGC and the board served as a mechanism for them to periodically be able to convene and discuss issues of major public significance.

It is not an activist board, but it is a mechanism that worked fairly well during my tenure and helped to deal with major public policy concerns.

Senator REED. Well, I must confess, one of the concerns I have is the notion of independence, and when you have Cabinet Secretaries who are effectively the board of directors, they are subjectand regardless of the Administration-to the current winds that are blowing through this town. And that to me is not something that is going to reassure the investing public and the markets that the decisions are being made on an independent basis based upon the financial conditions of the housing market in this case.

You know, I think with that model you run the risk—and I will not even get into the financial condition of the Pension Benefit Guaranty Corporation-of conditions which, if not realistically problems, appear to be problems to people.

Mr. WALKER. Senator, I would respectfully suggest that one might want to look at who would be the appropriate members of the board. In my personal opinion, clearly you would want to have the Secretary of the Treasury and the Secretary of Housing and Urban Development. But you may want other individuals, such as the ones the Chairman suggested, to be involved who tend to be somewhat more independent and/or have term appointments that could help provide that check and balance.

Chairman SHELBY. It also would bring prestige to this board, would they not?

Mr. WALKER. Yes, Mr. Chairman, depending upon what positions and who the parties are, it could.

Senator REED. Well, again, a contrary view might be that some of our boards work very well because they have a term, they are removed from the day-to-day politics, the individuals have been in several administrations. Again, I think we should be very, very sensitive to the notion of independence because of the signals it will send to the marketplace.

Let me ask something else, too. There is the notion with these GSE's that there is an implicit subsidy to their activities because of their perceived benefit of not failing, we will step in. What is your view on that?

Mr. WALKER. Well, various studies have been conducted over time that speak of this implicit subsidy, one recently conducted by the staff of the Federal Reserve Board. I think there is a general view that some people presume that if there was a failure at one of these institutions, the Federal Government would step in.

As you know, the Federal Government is not obligated to step in. There are no appropriated funds involved at the present point in time. But quite frankly the Federal Government is not obligated to step in for the Pension Benefit Guaranty Corporation either. Nonetheless, perceptions of this—

Chairman SHELBY. Or large banks.

Senator REED. Or large banks.

Mr. WALKER. Or large banks. Nonetheless, there is a broad-based market perception that the Federal Government stands behind this entity, and that clearly has an impact.

Senator REED. I think your comments are useful because this perception is not exclusive to Fannie Mae and Freddie Mac. As the Chairman points out, I think most people in the market would assume we would not let our largest or second largest bank fail because of the consequences.

Mr. WALKER. That is correct. There are other important entities where the Government would be presumed to step in. Whether or not that will occur one can debate.

Senator REED. Thank you, Mr. Walker.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Crapo.

STATEMENT OF SENATOR MIKE CRAPO

Senator CRAPO. Thank you very much, Mr. Chairman.

Mr. Walker, if we were to proceed with legislation that would establish a new independent regulator for both Fannie and Freddie and the Federal Home Loan Banks, it seems to me that one area of obvious difference is the statutory capital structure for the GSE's. Do you have any insight that you could share with us with regard to how we might contend with that difference in the legislation that would be developed?

Mr. WALKER. Tom, I would ask if you have any thoughts on that based on our past work.

Mr. MCCOOL. I think that, again, it is different to have a capital framework written in statute. If you look at OFHEO's capital statute versus the Finance Board or the bank regulators, OFHEO has the one that is written in statute. I think that our view would be that Congress can write a capital standard and put it in the statute, but it would be useful to give the regulator some ability to have the flexibility to go above that minimum in cases where either new risks arise or new situations arise that were not foreseen by the legislation.

Senator CRAPO. So are you saying that we would have the same structure for all entities, or would the new regulator have the ability to have different structures?

Mr. MCCOOL. I believe that, again, the point would be that you want a risk-based capital approach that dealt with the risks_that the entities were undertaking, and whether they are Home Loan Banks or Fannie and Freddie, for example, if you combine their reuglation, they would all have the same risks although not in the same combinations. But you would want the same capital to be applied to the same risk.

Mr. WALKER. Senator, I think you may want to have a statutory structure or framework. At the same time, I think it is important for the regulator, as we note in our testimony, to have reasonable flexibility to be able to make judgments about what the appropriate capital requirements should be given the risk involved. And one would have to assess that issue in connection with each of the various entities that they are being regulated. So it would be based

on the substance or the nature of what the relative risk is. If the facts were the same, you would get the same answer. But the facts may not be the same between these different entities.

Senator CRAPO. So how would we have a statutory capital structure but then have the regulatory flexibility? Are you saying we would define the capital risk by statute and then have the regulator determine how to apply that risk?

Mr. MCCOOL. Well, actually, let me back up. It may be that the best thing to do would be not to have a statutory capital structure and to give the regulator criteria for applying capital to risk, which, again, is more or less the way it works for bank regulators. The bank regulators do not have a statutory capital structure, but they are supposed to provide a capital structure that is consistent with the risks that the institutions undertake. So rather than define broad criteria, it might be best to give the regulator flexibility within the context of particular activities to define capital in accordance with the risk undertaken.

Senator CRAPO. Mr. Walker, do you agree with that?

Mr. WALKER. I do. We are saying the same thing in a different way.

Senator CRAPO. All right. Thank you very much.
Chairman SHELBY. Senator Corzine.

STATEMENT OF SENATOR JON S. CORZINE

Senator CORZINE. Thank you, Mr. Chairman.

Let me just pursue that question. I want to make sure I understand this correctly. You are talking about flexibility with regard to the definition of the risk-based capital rules that the regulator would provide. Are you distinguished between absolute minimum capital requirements and risk-based capital? Or are you underscoring the need for flexibility with one or both?

Mr. MCCOOL. Again, currently there is a statutory minimum for Fannie and Freddie in terms of their leverage ratios or effectively their minimum capital standards. I think that one could put in place, again, minimum capital standards in legislation that were not necessarily risk based, but the point would be you would want to give the regulator the flexibility to set risk-based capital standards that were, again, consistent with the level of risk undertaken by the entities. So that if different entities did similar things, they would face similar capital charges. And if they did different things, the differences would be reflected in the capital charges.

Mr. WALKER. Senator, a different way of saying it you may want to establish the floor, but you may not want to establish the ceiling, and make sure that you have criteria such that the regulator can apply the facts and circumstances to determine what the appropriate capital requirement would be given applicable those facts and circumstances.

Senator CORZINE. I think that is actually one of the difficult judgments that we are going to have to make, and, you know, how do you then figure out what is the appropriate minimum capital standard. It is true, though, that banks operate off of a risk-based system than these more modern regulatory structures that people are trying to appropriate.

Let me ask, are there any clear or are there any objective standards on why one might think that a regulatory agency should be in a group of regulatory elements? I heard you talk about structure and authorities, but you left out synergies. When one would consider the model of it being within the Treasury, one might say that having a stand-alone entity does not allow for the synergies of staying current with the latest financial knowledge base in the same way that you would if you were in a broader organization that had a culture of dealing with regulation or the common use of software and other elements that may be appropriate. You are going to have to build a whole bureaucracy that would not otherwise exist.

Are there objective standards or objective metrics that you would use to justify one versus the stand-alone agency that might be outside of just the structural issues and authorities that you spoke to? Mr. WALKER. I think there are certain issues, Senator, that have to be addressed irrespective of whether you are within a particular department or agency like the Treasury or whether you are independent. I mean, do you have a critical mass? Do you have the right type of skills and knowledge? Do you have the right type of authorities? Do you have enough credibility, if you will, and capability to get the job done?

I do, however, believe there is a difference between coordination and integration, and if you are an entity that is an independent entity within a larger entity, then the odds are you are going to end up having more ongoing interaction and more questions being asked as to there are opportunities to do things in the same way or in a synergistic manner, and there could be some incremental benefit that could be achieved.

But I think the more important issues are the critical mass, the capabilities, the credibility, and the authorities. Those are the more important issues, I believe.

Senator CORZINE. Did you feel when you looked at OFHEO whether it failed in matching up against or at least was weaker than it would have otherwise been against those criteria, whether structure, critical mass, authorities, and maybe even synergies where there might be checks and balances within the system?

Mr. WALKER. We believe that there would be a significant plus to combine the regulators, to have a single regulator for safety, soundness, and mission, and that that regulator needs additional authorities above and beyond what authorities that OFHEO does not have right now.

Tom, do you have anything to add?

Mr. MCCOOL. Again, that part of the issue is that I think we believe that having the Federal Home Loan Banks and Fannie and Freddie in the same entity, being regulated by this entity would create synergies. It would allow you to provide more of a career track for examiners. It could grow from more simple home loan banks, up through more complicated home loan banks, up to Fannie and Freddie, and would allow more cross-matching across various types of expertise within, again, a regulator with more critical mass.

Senator CORZINE. But coming back to that, you get that critical mass by combining the different regulators. Then it is a separate issue as to whether or not you get any additional synergy-you get

« iepriekšējāTurpināt »