WASHINGTON - The Federal Reserve Board Tuesday lowered the capital requirements for banks that sell small-business loans and leases with recourse.
Previously, the Fed required banks to hold capital against the entire asset, even if the recourse agreement held the bank liable for only a small portion of the asset's potential loss of value.
The new rule, which takes effect Friday, corrects that problem, only requiring bankers to hold capital against the amount they could lose if the purchaser exercises the recourse option.
The Fed included several restrictions - the transaction must be considered a sale under GAAP accounting, the bank must establish a noncapital reserve fund, and these types of recourse deals cannot exceed 15% of a bank's risk-based capital.
The change should boost small-business lending, said Karen Shaw-Petrou, president of the industry consulting firm ISD-Shaw Inc.
The new rule allows banks to sell these loans and leases without taking a large capital hit, she said. That would free the bank to use the capital for more small-business loans, she said.