Government-Sponsored Enterprise
Candlefocus EditorThe purpose of GSEs is to reduce the cost of borrowing for citizens and make credit more easily accessible. It works by offering fixed-interest-rate loans with longer maturities than those normally available in the open market. GSEs are able to do this because they are able to access funds from the federal government at lower rates than banks and other private lenders.
In most cases, GSEs are explicitly backed by the government. This means that, should a GSE be unable to pay its debts, the government would assume responsibility for those debts. This implicit guarantee from the government ensures that GSEs are able to borrow funds more cheaply than private lenders can. However, it also makes GSEs vulnerable to potential losses should these be conservatively managed.
In the United States, GSEs are also subject to regulations like other financial institutions. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is a law which seeks to strengthen the regulatory powers of the US government over GSEs. This law imposes additional restrictions and regulations on GSEs and their activities, in line with the principles of the global financial crisis.
GSEs play a key role in promoting financial stability, facilitating the availability of credit, and making the cost of borrowing cheaper. They should not replace private lenders but rather work alongside them to ensure adequate supply of funds in the economy, ultimately enabling people to gain access to credit and finance their projects. However, GSEs should be carefully and regularly managed to ensure that their activities remain within the limits of their mandates, in order to protect taxpayers from further losses.