The full impact of FAS 166 and 167, which eliminate the qualifying special purpose entity concept previously used to keep most US securitisations off balance sheet, would require banks to hold full regulatory capital at the start of the year. But the regulators, led by the Federal Reserve and the Federal Deposit Insurance Corp, have launched a consultation to phase in the
requirement.
The draft notice of proposed rulemaking remains agnostic on many aspects but if adopted, the schedule would require banks hold capital against 25% of the consolidated assets in the first quarter — or the existing capital charge for residual exposure and credit enhancement if higher — 50% in the second quarter, 75% in the third quarter, and 100% in the fourth quarter.
The new accounting rules will eliminate the current carve-out for certain consolidated asset backed commercial paper programmes, which allows banks to hold risk based capital only against their contractual
obligations.
The regulators also propose to reserve the authority to treat unconsolidated special purpose entities as on balance sheet for capital purposes where deconsolidation "is not commensurate with the actual risk relationship of the banking organisation to the entity".
The consultation asks banks to provide comments and evidence on a number of questions about the impact of the accounting rule changes, such as how they will affect financial position, lending and securitisation, which types of entity would have to be consolidated, what features would be more likely to result in implicit support, and the interaction with government initiatives such as the loan modification programme and the 5% retention rule.
Meanwhile the American Securitization Forum has written to the Federal Deposit Insurance Corp asking the regulator to amend the Securitisation Rule, which sets out the conditions for legal isolation of securitised assets from the estate of the
originator.
Because the securitisation rule requires that deals meet sale accounting criteria to achieve legal isolation, many market participants are worried that the new consolidation rules could threaten the bankruptcy remoteness of existing and future securitisations in the US.
Once the new rules come into force, most securitisations would be accounted for as secured loans, thereby removing them from the securitisation rule’s safe harbour.
"The rule has been an essential part of the legal analysis performed by counsel to issuers providing legal opinions required by underwriters and rating agencies," said the ASF in its letter to FDIC special adviser Michael Krimminger.
"The continued ability to issue securities out of some structures and to obtain the ratings required for TALF-eligibility or otherwise for economically viable execution of securitisation transactions may be dependent upon the continued availability of the safe harbour benefits of the rule.
"In addition, outstanding securities issued in connection with securitisations that qualified for the protections offered by the rule prior to the adoption of the new accounting rules face the prospect of ratings downgrades if the rule is not modified, which could result in forced sales or other market disruption."
Chris Dammers