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Fannie Mae and Freddie Mac have the potential to pose systemic risks to the financial system and need a stronger regulator, Treasury Secretary Henry Paulson said in a testimony before the Senate Banking Committee.
Paulson asked Congress to enact a three-part plan that will “establish a new world class regulator for the GSEs”. The plan announced over last weekend includes an 18-month temporary increase in Treasury's existing authority to make credit available for the GSEs, and gives Treasury an 18-month temporary authority to purchase equity in either of the two GSEs.
The plan will also provide the Federal Reserve authority to access information and perform a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards.
“Our proposal was not prompted by any sudden deterioration in conditions at Fannie Mae or Freddie Mac”, Paulson said. “We have long maintained that the GSEs have the potential to pose a systemic risk and worked with Congress on legislation to create a GSE regulator with authorities appropriate to the task and on par with other financial regulators. We must complete this work.”