FDIC: GSE Limits No Threat to Banks

A study by the Federal Deposit Insurance Corp. has found that the value of Fannie Mae and Freddie Mac debt and mortgage-backed securities held by banks and thrifts would be only marginally affected if Congress stripped away some of the benefits the two government-sponsored enterprises enjoy.FDIC-insured institutions hold more than $1 trillion of GSE debt and MBS, and some institutions have more than 100% of their capital invested in GSE securities. However, the FDIC says it does not believe the banking industry would be vulnerable if spreads on these securities suddenly widened by 30 to 40 basis points due to GSE legislation. "Under restrictive assumptions, we find that the industry is well positioned to absorb a widening of yield spreads on GSE-related securities and the elimination of explicit treatment of GSE-related securities in RBC regulations," the FDIC emerging-issues study says. Risk-based capital rules assign very low capital requirements on GSE securities. The FDIC analysis does note that many banks might be forced to sell a portion of the GSE securities if Congress limited those investments to 10% of assets. "Such restructuring could contribute to and expose insured institutions to harmful market conditions that could result in losses on GSE-related securities not contemplated in this analysis," the FDIC says.