Bankers are protesting a plan to overhaul risk-based capital rules for recourse agreements and other tools used to sell securitized assets.
The proposal, bankers said in recent comment letters to regulators, would raise securitization costs by forcing them to hold more capital than necessary.
Securitization "would overnight become highly unprofitable and banks would be driven from yet another attractive financing business," wrote Robert A. Rosholt, chief financial officer at First Chicago NBD Corp.
In November regulators proposed that banks backing the riskiest portion of a securitization be required to hold higher capital than those backing less risky pieces. Currently 8% capital must be held against all securitized assets.
The plan would ease capital burdens for the highest rated portions of securitizations, by dropping the reserve requirement to 1.6% for parts that are graded AAA by a private rating agency.
But bankers said the requirements for lower rated portions are too high and in some cases would force them to hold more reserves than if the entire securitization pool had stayed on the books.
They are also upset because the plan would bring capital requirements for letters of credit and other direct credit substitutes in line with recourse agreements.
Banks that sell pools of assets must keep 8% capital against those assets if they have entered recourse agreements to buy back troubled loans. To get around the requirement, institutions generally pay third parties, often other banks, to issue a letter of credit to pay off any defaults.
Because letters of credit have much lower capital requirements, regulators argue that the banks are not adequately prepared for defaults.
But bankers say higher capital requirements are unjustified because most asset pools have collateral set aside that would be tapped before the letter of credit.
"The plan is unwarranted and unjustified," wrote Bankers Roundtable general counsel Richard M. Whiting. "Direct credit substitutes have a lower credit risk than transferring assets with recourse."
Complaints over recourse proposals are nothing new. Regulators have been trying to rewrite the rules since 1990 and in 1994 issued an advanced notice of proposed rulemaking that was panned by the industry.
Though industry officials praised regulators for the latest attempt to lower capital requirements for low-risk portions of an asset pool, they said the proposal would require too much money be set aside for investment grade portions rated BBB to AA.
The plan would "competitively disadvantage U.S. banking organizations," wrote Mellon Bank Corp. general counsel Michael E. Bleier.
As a result nonbanks and foreign depository institutions will capture the business, he said.
Bankers also argued that their internal models, not private rating agencies, should be used to judge the levels of risk in a securitization pool.
The proposal "gives ratings agencies de facto control of risk-based capital requirements," wrote John H. Huffstutler, chief regulatory counsel for Bank of America. "Furthermore, the bank would have to pay for the privilege of being second-guessed and then would be penalized whenever the second-guesser disagreed with the bank's own credit analysis."
Also, a top rating agency issued a warning. "The proposed regulations create a moral hazard because they establish an expanded business opportunity for agencies willing to issue high ratings on securities that have high levels of credit risk," wrote Donald E. Selzer, managing director of Moody's Investors Service.
