FDIC Delays Restrictive Securitized Asset Plan

WASHINGTON — The Federal Deposit Insurance Corp. delayed a proposal Tuesday to place new restrictions on securitizations after board members disagreed about its impact.

The initial plan's goal was to crack down on institutions that did not properly underwrite mortgages and other assets before selling them into the secondary market. The FDIC wanted to ensure these institutions jumped through a variety of hoops to earn the "safe harbor" accorded to securitized assets in a failure.

But two board members said the plan would conflict with pending legislation and could harm the securitization market. They convinced the FDIC to release a broad advance notice of proposed rulemaking that merely asks for comment on the best way to proceed.

"This approach will stimulate robust comment on this issue now, but in a way that will minimize unintended consequences," said Comptroller of the Currency John Dugan.

The fight over the securitization proposal came as the FDIC board voted to increase the agency's budget by 55%, to $4 billion, to deal with the rising number of bank failures. Funding to deal with receiverships next year jumped 92%, to $2.5 billion. The agency also nearly doubled its temporary staff, to 3,421, primarily to deal with resolutions.

"Even when the failures stop, these costs will continue to stay up for an extended period of time because of the continuing receivership management," Thomas Peddicord, a deputy director in the FDIC's division of finance, told members of the board.

But the five board members spent most of the open meeting debating the securitization proposal. The FDIC's three in-house board members — Chairman Sheila Bair, Vice Chairman Martin Gruenberg and independent member Thomas Curry — supported the original plan to put restrictions on institutions that securitize.

But Dugan and the Office of Thrift Supervision's acting director, John Bowman, said the plan could stunt securitization, put banks at a competitive disadvantage to nonbank lenders and conflict with provisions in the regulatory reform bills being considered by Congress.

"Key issues and questions raised by the" FDIC action "are also addressed by the financial reform legislation in both house of Congress, which could become law in the not-too-distant future," Dugan said. "Those legislative proposals are not the same as an FDIC proposal, however, in that they are less specific, involve other agencies besides those represented on the FDIC board, and would apply across the board to all securitizations, not just those sponsored by insured depository institutions."

At issue is how accounting rule changes for securitized assets will affect the FDIC's long-standing practice of not seizing assets backing securitizations in a failure.

Under previous regulations, the agency kept its hands off of those assets if they met certain characteristics of an off-balance-sheet sale.

But a Financial Accounting Standards Board rule issued in June, which is to take effect next year, would force lenders to report securitized assets on their balance sheets — requiring the FDIC to come up with a new plan for handling those assets.

Last month the agency said it would maintain the hands-off policy until April but propose additional limitations. Under the plan the FDIC was initially considering, the FDIC would have required banks to retain a minimum portion of securitized loans, wait 12 months between making a loan and including it in a mortgage-backed security and prohibit external support such as a credit enhancement for securitizations.

Bair said the plan would "go far towards correcting the weaknesses in securitization that contributed to the crisis. "These conditions would allow insured banks and thrifts to profitably securitize loans in a way that aligns incentives to support sustainable lending," she said.

But Dugan and Bowman said some of the restrictions were too severe. The original plan "would bar all external credit support; however, external credit support may serve to reduce risk to the banking system," Dugan said. "While maintaining 'skin in the game' is a worthwhile objective, restricting all third-party support may result in investors demanding higher rewards, and these costs would likely be passed on to consumers."

Both regulators also focused on including the Federal Reserve Board and the Securities and Exchange Commission in the deliberations. Dugan said that a final policy should not put insured banks and thrifts on a different playing field than nonbank financial institutions overseen by other regulators.

Among the 35 questions the agency asked in the ANPR are whether there are any capital structures for securitizations that should disqualify certain securitized assets from the safe harbor, what would be the impact of limiting the number of tranches in a mortgage-backed or other type of asset-backed security and what is the appropriate amount of financial interest that an originator should retain in a securitized asset. The agency will accept comments for 45 days after the ANPR's publication in the Federal Register.

In another move at the meeting, the FDIC board finalized an August proposal requiring capital levels at all institutions to reflect the FASB rule.

The rule requires banks and thrifts to hold capital for assets that they must include on their balance sheets as a result of the accounting change, and removes an exclusion of certain commercial paper from an institution's risk-weighted assets.

It was largely unchanged from the original proposal. However, responding to industry comments, the regulation allows institutions to wait six months until after the FASB rules take effect — to the end of June — to begin implementing the capital changes, and then another six months to finish implementation. (The industry had requested a three-year phase-in period.)

The Fed, Office of the Comptroller of the Currency and the OTS are also expected to approve the rule soon.