In a major victory for the securitization market, the Federal Reserve has declared that asset-backed conduits are not considered deposits of the banks that sponsor them, effective immediately, according to Stephanie Martin, associate general counsel of the Board of Governors of the Fed. The much-anticipated decision is a boon to the asset-backed commercial paper world because it removes an onerous hurdle for financial institutions that had conduits. It means banks will not have to hold reserves on the vehicles under the new consolidation directive, the Financial Accounting Standards Board's FIN 46.
Under the regulation, banks are forced to consolidate their conduits and put them back on balance sheet; this opened up the question as to whether the conduits were in fact deposits and subject to reserve requirements.
Securitization pros have been lobbying the Fed since last year to decide that these conduits do not constitute deposits; had the Fed decided differently, it would have made the CP market too expensive for banks to participate in. In the decision, staff members at the Fed have decided that bank-sponsored conduits are not technically deposits of the bank and therefore are not assets or liabilities. In short, they are not covered by Regulation D, which governs reserve requirements for banks.
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| Jason Kravitt |
"If they didn't come out with this, a lot of banks would have restructured or gotten out of the business," explains Jason Kravitt, a senior partner at Mayer Brown Rowe & Maw, who was active in discussions with the Fed. He notes the decision is important because it makes it more attractive for banks to sponsor commercial paper conduits, making that market more viable. He adds the commercial paper market is important for short-term financing needs and was one of the first markets to reopen after 9/11.
According to a four-page letter from Martin to the American Securitization Forum, which had been lobbying for the decision since last autumn, one of the factors that influenced the Fed staff's decision was "...program documentation to which the commercial paper purchasers are subject expressly provides that the ABCP Conduit commercial paper is not a liability of the sponsoring deposit institution." Click here for the letter.
Martin adds the decision is a staff interpretation and not one that had been voted on by the full board.
