Guidelines on asset securitization were issued Wednesday by the Office of the Comptroller of the Currency.
The 10-page bulletin outlines the risks that national banks face when they securitize assets. Michael Brosnan, acting senior deputy comptroller for capital markets, said the agency decided to issue the instructions because a growing number of banks are entering the market.
"We're bullish on securitization," Mr. Brosnan said. "We just expect the banks to do it right and there are certain things that can go wrong."
For example, the market pressures banks to securitize their best assets, which means "something other than the best is staying on the bank's balance sheet," Mr. Brosnan said.
In addition, servicing mishaps, such as inefficient collection of securitized loans, expose banks to transaction risks, he said.
"Effective servicing can be a key component in maintaining the credit quality of receivables," according to the agency's 10-page release.
Because information on the performance of securitized assets is public, problems "will reflect poorly on the bank's underwriting and risk assessment capabilities," the agency warned.
The OCC also noted that poor performance could limit a bank's access to the securitization market or affect the price of its issues.
Banks use asset securitization to diversify their funding sources and to manage credit risk, liquidity, and capital.
Although roughly 30 banks issued public asset-backed securities last year, the OCC does not know how many banks fed loans to these banks, nor how many banks are selling assets in the private placement market.