Securitization isn't dead yet, but if the Financial Accounting Standards Board and the Federal Reserve get their way the wake isn't too far off, says Dennis Moroney, research director for bankcards at TowerGroup.
Asset-backed securities-aside from mortgage-backed bonds-remain vital to the health of financial institutions. The Federal Deposit Insurance Corporation has reported that U.S. credit card issuers rely on ABS financing to provide more than 50 percent of their capital needs, according to a TowerGroup report.
The issue is that proposed FASB amendments would eliminate the exemption for qualifying special-purpose entities, forcing financial institutions to account for securitized instruments such as credit card receivables on their balance sheets in the fiscal year starting November 2009. "The proposed FASB changes to FAS 140 and FIN 46 (R) are an example of how incoherent and even dysfunctional policy has become," Moroney says.
The report warns that forcing securitized assets onto the balance sheet could erode banks' annual net earnings by more than $60 billion and require billions of dollars in additional loan reserves and recapitalization. TowerGroup expects that almost all credit-card backed securities would end up on lenders' balance sheets, noting that the "securitized pool of credit card balances totaled approximately $369 billion" in second-quarter 2008. "Based on credit card delinquencies and average charge-off rates, U.S. credit card lenders in aggregate would have to increase loan-loss reserves approximately $18 billion, or five percent of the estimated securitized balances."
Lenders would face a hit on funding costs too. TowerGroup puts savings from securitized financing at 50 to 100 interest-rate basis points: "If all securitized balances were returned to creditors' books, the additional funding would cost an estimated $44 billion annually for the industry as a whole."
Moroney says that there's a "very good chance FASB will put its proposal on hold" until after the financial sector is well on the mend. But he's less certain about the changes in credit-card regulations recommended by the Fed.