WASHINGTON — Amid criticism over the Federal Deposit Insurance Corp.'s proposal to restrict a safe harbor for securitized assets at failed banks, the agency is likely to announce soon that it will temporarily extend an April 1 deadline to protect all such assets from seizure.
After an accounting change last year forced the FDIC to revisit its longstanding safe harbor for securitized assets, it temporarily kept a blanket exemption in place until the end of this month, while it considered longer-term reforms.
But after intense criticism from bankers over the FDIC's proposed restrictions and the potential for a lengthy rulemaking process, observers said the FDIC will have to extend the special status for at least a few more months.
"My expectation is the FDIC would extend the" safe harbor "at their March board meeting because if it is not extended, all securitizations by insured depository institutions will probably come to a halt April 1, when the safe harbor would no longer apply," said Tom Deutsch, the executive director of the American Securitization Forum. "The rating agencies would not be able to rate the securitization much above that bank's rating … without a safe harbor applying."
Previously, securitized assets were exempt from the FDIC's normal seizures in bank failures and conservatorships, as long as they met criteria for off-balance-sheet accounting. But in June, the Financial Accounting Standards Board required banks to move off-balance-sheet securitizations onto their books, which invalidated the safe harbor.
To assuage investors, who would shy from securitizations if the FDIC could just seize their assets when an originating bank failed, the agency in November said the safe harbor would temporarily continue despite the FASB rule.
The next month, the FDIC asked for comment on wide-ranging conditions for receiving the special treatment in the future, which were intended to rein in securitizers blamed for their part in the financial crisis.
The proposed conditions included a 5% retention requirement, a one-year minimum hold period before an originating bank could securitize a loan, enhanced disclosure standards and limits on the amount of tranches in a securitization.
But the proposal triggered substantial criticism from bankers, including that the FDIC was acting without other regulators and before Congress had finalized securitization reforms in the financial overhaul package.
Moreover, the proposal came in the form of an "advance notice of proposed rulemaking," which would have to be followed by a more formal proposal, another comment period and a final rule before it could be enacted.
"With no rule in place, I don't really see any alternative" to extending the safe harbor, said Sean Mahoney, a partner at K&L Gates. "There's no way around it."
A top FDIC official all but assured an extension of the safe harbor at a conference last month. "It's fair to say that we will need to extend the March 31 safe-harbor period … as we propose final rules and get those reviewed and get comment on those final rules," said Michael Krimminger, a special adviser for policy to FDIC Chairman Sheila Bair. "I anticipate we will be doing that in the not-too-distant future."
He said the agency has already begun discussing with other regulators how to coordinate a final policy. "One of the goals we want to achieve … is a consistent standard that's not subject to arbitrage across different types of entities," Krimminger said.
But how long the exemption will remain unaltered is unclear. Industry insiders are pushing the agency to continue it until a final rule is crafted. "They should extend the safe harbor indefinitely until the final rule is established so there can be certainty as to how this will work in the future," said James Rockett, who is co-chairman of the financial institutions corporate and regulatory group at Bingham McCutchen LLP.
In a Jan. 4 letter to the FDIC, Deutsch said an extension is necessary especially because institutions will need sufficient time to implement the FDIC's final policy.
"We respectfully request that the FDIC extend the transition period to 6-12 months after the date on which the final safe-harbor rule is published in the Federal Register."