Fannie Mae 2005 Annual Report Download - page 299

Minimum capital and critical capital standards are met with core capital holdings. Defined in the statute, core
capital is equal to the sum of the stated value of outstanding common stock (common stock less treasury
stock), the stated value of outstanding non-cumulative perpetual preferred stock, paid-in-capital and retained
earnings, as determined in accordance with GAAP. The minimum capital standard is generally equal to the
sum of: (i) 2.50% of on-balance sheet assets; (ii) 0.45% of the unpaid principal balance of outstanding
Fannie Mae MBS held by third parties; and (iii) up to 0.45% of other off- balance sheet obligations, which
may be adjusted by the Director of OFHEO under certain circumstances (see 12 CFR 1750.4 for existing
adjustments made by the Director of OFHEO). The critical capital standard is generally equal to the sum of:
(i) 1.25% of on-balance sheet assets; (ii) 0.25% of the unpaid principal balance of outstanding Fannie Mae
MBS held by third parties; and (iii) up to 0.25% of other off-balance sheet obligations, which may be adjusted
by the Director of OFHEO under certain circumstances.
OFHEO’s risk-based capital standard also ties capital requirements to the risk in our book of business, as
measured by a stress test model. The stress test simulates our financial performance over a ten-year period of
severe economic conditions characterized by both extreme interest rate movements and mortgage default rates.
Simulation results indicate the amount of capital required to survive this prolonged period of economic stress
absent new business or active risk management action. In addition to this model-based amount, the risk-based
capital requirement includes an additional 30% surcharge to cover unspecified management and operations
risks.
Each quarter, OFHEO runs a detailed profile of our book of business through the stress test simulation model.
The model generates cash flows and financial statements to evaluate our risk and measure our capital adequacy
during the ten-year stress horizon. As part of its quarterly capital classification announcement, OFHEO makes
these stress test results publicly available. Compliance with the risk-based standard is determined using total
capital as defined in the table below.
The following table displays our regulatory capital classification measures as of December 31, 2005 and 2004.
2005
(1)
2004
As of December 31,
(Dollars in millions)
Core capital
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,433 $34,514
Required minimum capital
(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,233 32,121
Surplus of core capital over required minimum capital . . . . . . . . . . . . . . . . . . . . . . . . . . $11,200 $ 2,393
Surplus of core capital percentage over required minimum capital
(4)
. . . . . . . . . . . . . . . . . 39.7% 7.4%
Total capital
(5)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,091 $35,196
Required risk-based capital
(6)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,636 10,039
Surplus of total capital over required risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . $27,455 $25,157
Surplus of total capital percentage over required risk-based capital
(7)
. . . . . . . . . . . . . . . . 217.3% 250.6%
Core capital
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,433 $34,514
Required critical capital
(8)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,536 16,435
Surplus of core capital over required critical capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,897 $18,078
Surplus of core capital percentage over required critical capital
(9)
. . . . . . . . . . . . . . . . . . . 171.3% 110.0%
(1)
Except for required risk-based capital amounts, all amounts represent estimates which will be resubmitted to OFHEO
for their certification. Required risk-based capital amounts represent previously announced results by OFHEO. OFHEO
may determine that results require restatement in the future based upon analysis provided by us.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)