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Threat of Increased Regulation
In response to the worries of Congress after the savings and loan crisis in the 1980s, Treasury, CBO and GAO issued a series of reports in the early 1990s, making recommendations to improve the safety and soundness of the GSEs and thereby reduce the potential risk to the government.6 These reports consistently recommended strengthening safety and soundness regulation that would give regulators enforcement powers similar to banking regulators.
GAO and others noted that there was no safety and soundness regulator for SLMA, and no required level of capital.7 It recommended a single regulator for all GSEs for safety and soundness as well as charter and program issues. 8 The regulator would establish capital requirements for all the GSEs, including SLMA, based on their risks, using computer modeling for capital needed during stressful economic periods. The total capital requirements would be a combination of a leverage ratio of fixed percentages of outstanding obligations, both on and off-balance sheet, with the capital needed under the stress tests.9 The regulator would have strong enforcement authorities, similar to those for bank regulators. They would include removal of officers, cease and desist orders and civil money penalties.10
The level of monitoring that GAO recommended was vastly different than what SLMA had been accustomed to. It would have meant that the regulator could have access to all GSE operations and all books and records - systems and personnel, regular reports on internal controls, financial performance and business strategies. Very alarming for SLMA were the triggers for increased regulatory monitoring: Rapidly expanding business volume, entry into new activities and issuing or purchasing new types of debt instruments. 11
SLMA opposed any further oversight, saying that “increased regulation will, over time, stifle creativity and impede the ability of Sallie Mae to manage its risk and quickly and creatively respond to programmatic initiatives requested or supported by our congressional overseers. We do not want to begin to manage our business ‘for the regulators.’ That style of management has not served other industries well[.]”12
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