WASHINGTON - Asset securitization problems like those found at First National Bank of Keystone (W.Va.) are showing up at other community banks and must be fixed, federal regulators warned Monday.

According to new interagency guidelines, a small but growing number of community banks and thrifts are getting into the business of securitizing and selling loans and other assets, only to find they are in over their heads. Fewer than 200 institutions nationwide are regularly selling and securitizing assets, regulators said.

Deprived of core deposits and eager to improve their performance ratios, these smaller institutions are entering waters previously plied by only the biggest, most sophisticated banks. What they encounter are bewildering accounting rules that require sophisticated models of default, prepayment, and discount rates on the underlying loans.

When those assets are subprime, the challenges - and the risks - are magnified. Small banks need to be cautious, regulators said.

"The accounting rule is complicated," said Kathryn Dick, director of market risk at the Office of the Comptroller of the Currency. "It's difficult for anyone, probably most difficult for a community banker."

Of most concern to regulators are "residuals" or "retained interests," which regulators describe as the interest an institution keeps after securitizing and selling assets. Accounting rules that took effect in 1997 require the seller to count residuals as assets, and thus as capital. But in some cases, regulators claim, community banks are placing too high a value on them. For residuals based on subprime loans, there may be no market whatsoever.

"The best evidence of fair value is a quoted market price," according to the guidelines. "If a best estimate of fair value is not practicable, the asset is to be recorded at zero in financial and regulatory reports."

If forced by examiners to lower their residuals' value, some community banks active in securitization could suddenly have a capital problem. Recently, for example, the OCC deemed Goleta (Calif.) National Bank "significantly undercapitalized" and ordered the institution to raise additional capital to offset its residuals.

The "poster children" for these problems, said Mark S. Schmidt, associate director of bank supervision policy at the Federal Deposit Insurance Corp., are First National Bank of Keystone, which failed Sept. 1, and Pacific Thrift and Loan, a Woodside, Calif.-based institution that closed Nov. 19.

First National claimed residuals of $435 million, and Pacific Thrift about $50 million. But FDIC liquidation experts say they may not be able to sell any of those assets.

Small banks that securitize and sell loans are at a disadvantage for several reasons, regulators said. They are less likely than large banks to consult risk management experts. They often have a less diverse body of assets and therefore are more likely to have a concentration of residuals. And they are often guided by a nearly all-powerful leader.

"Often in a small bank, what you find is that there's one or two people that dominate the structure and the setting of the strategy," Ms. Dick said. "There may not be anyone else in the bank prepared to challenge their modeling assumptions."

The guidelines released Monday urge bank managers and directors to conservatively value their residuals, periodically review the soundness of their models, and have a good liquidity plan in place in case of market disruptions.

The guidelines also urge banks to limit their residuals to a reasonable but unspecified percentage of Tier 1 capital. According to the FDIC, 11 banks and thrifts nationwide have residuals that total at least 25% of their equity capital. Two of the four institutions whose residuals equaled 100% or more of their equity capital at midyear later failed: First National, and Pacific Thrift.

The interagency guidelines may be a precursor to new rules. The four bank and thrift agencies are reviewing a proposed rule that would limit - or eliminate - the amount of subprime-based residuals that a bank could count toward risk-based capital.

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