Government-Sponsored Enterprises

A Framework for Limiting the Government's Exposure to Risks Gao ID: GGD-91-90 May 22, 1991

Pursuant to a legislative requirement, GAO reviewed the risks undertaken by government-sponsored enterprises (GSE) in order to propose: (1) appropriate regulatory authorities for GSE federal regulators; (2) a regulatory structure to administer GSE oversight; and (3) capital standards to adequately protect the government's interest in GSE.

GAO found that: (1) the Department of Housing and Urban Development (HUD) lacked the authority to set capital rules for the Federal National Mortgage Association and the Federal Home Loan Mortgage Association; (2) the Student Loan Marketing Association lacked federal oversight of its financial activities and a minimum capital requirement; (3) the Farm Credit Administration lacked specific authority to set capital standards for the Federal Agricultural Mortgage Corporation (Farmer Mac); and (4) the Federal Home Loan Bank System's statutory capital rules used a capital-to-outstanding debt ratio that did not consider risks of off-balance activities or the relative riskiness of various bank assets. GAO believes that in order to overcome those shortcomings: (1) GSE regulators need authority to set rules, monitor financial performance and compliance with regulations, set minimum capital requirements, enforce regulations by imposing appropriate sanctions, and levy assessments to cover supervisory costs; (2) GSE regulatory authorities should be similar to those for banks, with federal oversight supplementing corporate guidance; (3) GSE should be regulated by a single independent regulatory body overseen by an independent board of directors that is prominent in government and has the organizational capacity to protect the government's interest in accomplishing GSE public purposes; (4) minimum capital standards should take into account the amount of capital needed to withstand stressful economic environments, and enterprise size so that reserves can cover management, operations, and business risks; and (5) Farm Credit Banks and Banks for Cooperatives should continue to follow bank-like, risk-based capital rules since they compete directly with commercial banks.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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