Fannie Mae 2012 Annual Report Download - page 37

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We expect Congress to continue consideration of housing finance reform in the current congressional session, including
hearings on GSE reform and the consideration of legislation that may alter the housing finance reform system or the activities
or operations of the GSEs.
In sum, there continues to be uncertainty regarding the future of our company, including how long the company will continue
to exist in its current form, the extent of our role in the market, what form we will have, and what ownership interest, if any,
our current common and preferred stockholders will hold in us after the conservatorship is terminated. See “Risk Factors” for
discussions of the risks to our business relating to the uncertain future of our company and of how the uncertain future of our
company may adversely affect our ability to retain and recruit well-qualified employees, including senior management.
Financial Regulatory Reform Legislation: The Dodd-Frank Act
The Dodd-Frank Act is significantly changing the regulation of the financial services industry, resulting in new standards
related to regulatory oversight of systemically important financial companies, derivatives transactions, asset-backed
securitization, mortgage underwriting and consumer financial protection. The Dodd-Frank Act has affected and will continue
to directly affect our business through new and expanded regulatory oversight and standards that apply or will apply to us.
We may also be affected by provisions of the Dodd-Frank Act and implementing regulations that impact the activities of our
customers and counterparties in the financial services industry. Extensive regulatory guidance is still needed to implement
and clarify many of the provisions of the Dodd-Frank Act and regulators have not completed many of the required
administrative processes, which has created uncertainty for industry participants in some areas. It is therefore difficult to
assess fully the impact of this legislation on our business and industry at this time. We discuss the potential risks to our
business resulting from the Dodd-Frank Act in “Risk Factors.” Below we summarize some key provisions of the legislation,
as well as some rules that have been proposed by various government agencies to implement provisions of the Dodd-Frank
Act. We are currently evaluating these proposed rules and how they may impact our business and the housing finance
industry.
Enhanced supervision and prudential standards. The Dodd-Frank Act established the Financial Stability Oversight Council
(the “FSOC”), chaired by the Secretary of the Treasury, to ensure that all financial companies whose failure could pose a
threat to the financial stability of the United States—not just banks—will be subject to strong oversight. Under the Dodd-
Frank Act, the FSOC is responsible for designating systemically important nonbank financial companies, while the Federal
Reserve is responsible for establishing stricter prudential standards that will apply to certain bank holding companies and to
FSOC-designated systemically important nonbank financial companies. The Federal Reserve must establish standards related
to risk-based capital, leverage limits, liquidity, credit concentrations, resolution plans, reporting credit exposures and other
risk management measures. On December 20, 2011, the Board of Governors of the Federal Reserve System issued proposed
rules addressing a number of these enhanced prudential standards. The Federal Reserve may also impose other standards
related to contingent capital, enhanced public disclosure, short-term debt limits and other requirements as appropriate.
In April 2012, the FSOC adopted a three-step analysis process to determine whether a non-bank financial institution should
be designated as a systemically important financial institution and thereby subject to Federal Reserve supervision. The
process includes an opportunity for a company that could be designated as a systemically important financial institution to
submit written materials to the FSOC related to its potential designation. In making its determinations, factors the FSOC may
consider include: company size, leverage, interconnectedness, liquidity risk, maturity mismatch, importance to the economic
system and the extent to which a company is already regulated.
Depending on the scope and final form of the Federal Reserve’s enhanced standards, and the extent to which they apply to us
if we are designated by the FSOC as a systemically important nonbank financial company, or to our customers and other
counterparties, their adoption and application could increase our costs, pose operational challenges and adversely affect
demand for Fannie Mae debt and MBS. We have not received any notification of possible designation as a systemically
important financial institution.
In addition to changes that directly result from the Dodd-Frank Act, the capital and liquidity regimes for the banking industry
are also undergoing changes as a result of actions by international bank regulators. The Basel Committee on Banking
Supervision issued a set of revisions (known as Basel III) to the international capital requirements in December 2010.
Whereas the existing Basel II standards revised the risk-weighting process for assets, Basel III, which complements Basel II,
generally narrowed the definition of capital that can be used to meet risk-based standards and raised the amount of capital
that must be held. Basel III also introduced international liquidity requirements for the first time. The international Basel
standards require adoption by the domestic bank regulatory authorities before they become operative in the United States.
Typically U.S. bank regulatory authorities adopt Basel standards with adjustments that take into account U.S. banking law
and other relevant considerations.