The board of directors at the Federal Deposit Insurance Corp.
on Wednesday finalized a new capital rule that addresses industry concerns raised by Financial Accounting Standards (FAS) 166 and 167. FAS 166 and 167, which take effect in January, will require financial institutions to bring certain securitized assets onto balance sheets.
The industry for months has said
these accounting changes will adversely affect institutions' ability to securitize, as risk-based capital requirements would force these firms to allocate a substantial amount of capital essentially overnight. In her monthly Kitchen Sink
column for the January issue of HousingWire
magazine, Linda Lowell gives a review of regulatory issues raised by 166 and 167 and other unforeseen consequences of the rule change.
In it, Lowell comments: "The proposed rule also would expand regulators’ authority to require banks to include in risk based capital (RBC), commensurate with the actual risk relationship, the assets of SPEs and VIEs that they sponsored but do not have to consolidate under GAAP."
"Clearly regulators are certain that FAS 167 might not return a securitization to its sponsor’s balance sheet," Lowell adds. "They also recognized that future securitizations could specifically be designed to evade consolidation." The FDIC answered the industry's calls for capital relief Wednesday with the final rule, which provides an optional delay and phase-in for up to one year for the effect on risk-based capital and the allowance for lease and loan losses related to assets affected by FAS 166 and 167.
Lowell notes that proposed RBC rules asked for industry feedback on the possibility of capital relief in the form of phasing in the requirements. Given the magnitude of potential new capital needed, commenters requested a six month moratorium on application of the rule followed by a three-year phase in period.
"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," said FDIC chairman Sheila Bair in a statement
"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." The final rule -- designed to "better align regulatory capital requirements with the actual risks of certain exposures" -- also eliminates the risk-based capital exemption for asset-backed commercial paper assets, the FDIC said in a statement. FDIC said the transitional relief does not apply to the leverage ratio or to assets in conduits to which a bank provides implicit support.
The final rule comes after the FDIC on Tuesday approved an advance notice of proposed rule-making
regarding safe harbor protection of institutions' assets being transferred for securitization.
Write to Diana Golobay