The Federal Reserve recently released an analysis of the impact of the conservatorship of GSEs on community banks. They found that approximately five hundred banks, or about one in fourteen of the country’s banks, held preferred stock in Fannie Mae and Freddie Mac on their balance sheets entering into the 2008 financial crisis. The total exposure across banks and other depository institutions was at least $8 billion, and while a good portion of that was held by the largest institutions, community banks (banks with less than $10 billion assets) held at least $2.3 billion.
Many community banks found that the sharp, sudden drop in the GSEs’ preferred stock prices resulted in capital shocks from which they could not recover. The failures of fifteen depository institutions (either directly or indirectly) can be traced to losses from GSE investments, and another two institutions were forced to sell themselves to other institutions in order to avoid failure.
For the banks with GSE exposure, the median drop in the ratio of Tier 1 capital to risk-weighted assets was about three percent and this translated into loan growth two percentage points below other banks on average.
The study also found that banks with GSE losses were 50 percent more likely to be downgraded to a weak regulatory rating than other banks.
Read the Federal Reserve's full report.