The Failure of Supervisory Stress Testing : Fannie Mae , Freddie Mac , and OFHEO ∗

  title={The Failure of Supervisory Stress Testing : Fannie Mae , Freddie Mac , and OFHEO ∗},
  author={W. Scott Frame and Kristopher S. Gerardi},
Stress testing has recently become a critical risk management and capital planning tool for large financial institutions and their supervisors around the world. However, the one prior U.S. experience tying stress test results to capital requirements was a spectacular failure: The Office of Federal Housing Enterprise Oversight’s (OFHEO’s) risk-based capital stress test for Fannie Mae and Freddie Mac. We study a key component of OFHEO’s model—the performance of 30-year fixed-rate mortgages—and… CONTINUE READING
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