FDIC Proposes Toughening Securitization Rules

Posted by Orb Staff on December 16, 2009 No Comments
Categories : Residential Mortgage

The Federal Deposit Insurance Corp.'s (FDIC) board of directors has approved an advance notice of proposed rulemaking (ANPR) regarding safe-harbor protection for treatment by the FDIC as conservator or receiver of financial assets transferred by an insured depository institution in connection with a securitization or participation.

Since 2000, the FDIC has provided safe-harbor protections to securitizations by confirming that in the event of a bank failure, the FDIC would not try to reclaim loans transferred into a securitization so long as an accounting sale had occurred. However, with the Financial Accounting Standards Board's (FASB) changes in Financial Accounting Standards (FAS) Nos. 166 and 167, most securitizations will no longer meet the off-balance sheet standards for sale treatment when they take effect in the new year.

On Nov.12, the FDIC board approved a transitional safe harbor that permanently grandfathered securitization or participations in process through March 31, 2010. The ANPR will seek public comment on what standards should be applied to safe-harbor treatment for transactions created after March 31.

‘Today's ANPR will move the discussion forward to achieving a broad agreement on securitization reforms that can be implemented by all the regulatory agencies," says FDIC Chair Sheila Bair. "As deposit insurer and receiver for failed insured banks and thrifts, the FDIC has a unique responsibility to control the risks to the Deposit Insurance Fund (DIF). The misalignment of incentives in securitizations has contributed to massive losses to insured institutions, to the DIF, and to our financial system.

"The sample regulatory text for conditions to a FDIC safe harbor would, I believe, go far towards correcting the weaknesses in securitization that contributed to the crisis and is very consistent with the direction of legislation in the House and Senate," she adds.

The sample regulatory text is included in the ANPR. The ANPR will be open to public comment for 45 days following publication in the Federal Register.

The FDIC board has also finalized the regulatory capital rule related to the FASB's adoption of FAS 166 and 167.

Beginning in 2010, these new accounting standards will make substantive changes to how banks account for securitized assets that are currently excluded from their balance sheets.

The FDIC, working with the other federal bank regulatory agencies, developed the final rule to better align regulatory capital requirements with the actual risks of certain exposures. Banks affected by the new accounting standards will generally be subject to higher minimum regulatory capital requirements. The final rule provides an optional delay and phase-in for a maximum of one year for the effect on risk-based capital and the allowance for lease and loan losses related to the assets that must be consolidated as a result of the accounting change.

The final rule also eliminates the risk-based capital exemption for asset-backed commercial paper assets. The transitional relief does not apply to the leverage ratio or to assets in conduits to which a bank provides implicit support.

The rule provides temporary relief from risk-based measures. Banks will be required to rebuild capital and repair balance sheets to accommodate the new accounting standards by the middle of 2011, the regulator says.

‘I believe this rule moves in the right direction and will reduce the likelihood of a recurrence of some of the problems we have experienced in the financial and securitization markets,’ says FDIC Chairman Sheila Bair. ‘The capital relief we are offering banks for the transition period should ease the impact of this accounting change on banks' regulatory capital requirements, and enable banks to maintain consumer lending and credit availability as they adjust their business practices to the new accounting rules.’

Publication in the Federal Register is expected shortly.

SOURCE: Federal Deposit Insurance Corp.

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