WASHINGTON — While the Senate continues to debate the regulatory reform bill, the Federal Deposit Insurance Corp. moved forward Tuesday on two issues designed to prevent the next crisis.
With one, the FDIC would place new restrictions on securitizations designed to ensure that lenders retain at least some of the risk of the loans they originate and sell to the secondary market. With the other, the FDIC would require the 40 largest banks to detail how the government should unwind them if another crisis struck.
At a board meeting, FDIC Chairman Sheila Bair said the agency should not wait for Congress to act.
"I wouldn't say the legislation is going to become law any day now. It's certainly on a good track, but I assume [the Senate] will have to reconcile differences with the House," she said when discussing the securitization proposal. "We're talking about at least a couple more months. Then there is a rulemaking process which will go about 270 days. … It's time to move forward."
Her approach did not sit well with fellow board members. While supporting the proposal to force banks to draw up "living wills," Comptroller of the Currency John Dugan and acting Office of Thrift Supervision Director John Bowman objected to the securitization proposal, arguing the issue was better left to lawmakers.
"Given how close Congress is to addressing this issue, I think the FDIC should wait to see what Congress directs the agencies to do before acting unilaterally," Dugan said at the board meeting.
Still, the proposal passed on a 3-2 vote, with the FDIC's three members arguing that as interest returns to the securitization market, regulators cannot wait and risk a recurrence of the crisis.
"The system is awash in cash and investors are eager for return," Bair said. "Now is the time to put prudent controls in place, to make sure the party does not start up again."
The securitization proposal mostly mirrors the advance notice of proposed rulemaking the FDIC issued in December, but the revised plan does remove or ease certain provisions.
At issue is a long-standing special harbor for securitized assets — blocking the FDIC from seizing them if the originating bank fails — that no longer applies due to new accounting standards. The FDIC has temporarily extended the safe-harbor until October while it considers how to address the issue.
Under the proposal, which the industry has 45 days to comment on, originators must retain at least 5% of the credit risk for each tranche of a securitization to continue to enjoy the safe harbor. In addition, for mortgage-backed securities to get the exemption, the capital structure of the securitization would be limited to six tranches, and the originator would have to hold reserves equal to 5% of the proceeds of a sale to cover repurchase obligations.
The rule also would impose new disclosure requirements, including compliance with a separate Securities and Exchange Commission proposal to inform investors about the quality of an underlying asset in a securitization.
The FDIC removed a provision requiring originators to hold loans for at least a year before they can be securitized, and narrowed an earlier compensation requirement so that it now only applies to credit rating agencies. Fees for rating agencies would have to be spread out over five years.
The proposal still concerned industry representatives. "It's certainly an improvement over the ANPR, but there is a substantial amount of detail to work though to make sure there are bright-line tests to see whether the safe harbor has been or could be achieved by an issuer," said Tom Deutsch, the executive director of the American Securitization Forum.
The new proposal follows the SEC's plan by about a month. It also coincides with the Senate's debate on a bill that, among other sweeping changes to the regulatory landscape, would impose a 5% retention requirement for issuers of securitizations and charge the regulators with drafting rules to implement the measure.
Bair was joined by FDIC Vice Chairman Martin Gruenberg and Thomas Curry, another FDIC director on the board, in supporting the proposal. Gruenberg said regardless of the moves by lawmakers and other agencies, the FDIC, as the resolution agency responsible for failed-bank assets, must act. "One way or another the FDIC has to take some kind of action," he said. "Providing the safe harbor with no standards for securitization of assets is in my view to invite a repeat of the previous experience."
But Dugan, who was echoed by Bowman, said he was "uncomfortable using the FDIC's safe harbor rule as the lever to regulate securitizations," and it would be preferable for Washington to speak with one voice on the issue. He said it was wrong even for the SEC to move before Congress.
"Congress is on the verge of passing a provision that addresses the very issues" the FDIC was voting on, "but in a different and more comprehensive way that would apply to all securitizers — not just bank securitizers — via a joint rulemaking that would reflect the views of all the bank regulators and the SEC, not just the FDIC," Dugan said. "I strongly support such a comprehensive, coordinated approach."
By contrast, the board was unified in issuing the proposal on wind-down plans, which includes a 60-day comment period. Under the proposal, large banks would have to submit a "contingent resolution plan," aimed at guiding the FDIC on how the bank could be resolved separately from the complicated structure of its owner and web of affiliates.
Among the proposed reporting requirements are information about the bank's operations and management, affiliate relationships and other relevant information. While the legislation focuses on holding companies, the FDIC plan would target the industry's 40 largest banks — those that are owned by holding companies with more than $100 billion of assets — which must provide the agency with a detailed contingency plan in the case of a failure, including how the FDIC would resolve challenges in isolating the insured bank from its parent.
The wind-down plan would also have to identify a bank's capital structure along with its holding company and affiliates, the sources of intragroup funding, any systemic functions of the bank such as its involvement in the payments system and cross-border elements.
As part of a wind-down plan, a bank would also have to submit a "gap analysis" to point the FDIC to potential obstacles to doing a standalone resolution, and how those challenges could be addressed. Bair said the proposal would be another step in ending "too big to fail."
"The new paradigm is there will no longer be any open-institution assistance either for banks or for nonbanks," she said. "People should understand we are very serious about this."