On December 15, 2009, the Federal Deposit Insurance Corporation (FDIC) became the first of the US federal bank regulators to approve final rules responding to recent changes in US accounting standards for securitizations (see our June 22, 2009, Client Update, “Big Changes in Securitization Accounting”). The final rules are essentially identical to the rules proposed by the agencies late last summer.

There are two primary consequences from the accounting changes.

  • Banks (among other entities) that have traditionally achieved sale treatment in securitizations of their receivables will no longer be able to do so using many traditional “plain vanilla” structures, especially those that rely on qualifying special purpose entities (SPEs).
  • Many sponsors of asset-backed commercial paper (ABCP) conduits are likely to be required to consolidate the conduits.

Current US rules permit banks to calculate their risk-based capital requirements without giving effect to consolidation of ABCP conduits under the existing standard for consolidation of variable interest entities (VIEs) — a category that includes most bank-sponsored conduits and qualifying SPEs. There is no comparable relief for consolidation of qualifying SPEs, which have previously been used to avoid consolidation of many term market securitizations. Nor is there comparable relief for the calculation of the regulatory leverage ratio for either conduits or formerly qualifying SPEs (which will now be subject to the same consolidation standards as other VIEs).

Many market participants at one time had thought that the existing relief for conduits would be retained and that comparable relief for at least some formerly qualifying SPEs might be provided, possibly along with some leverage ratio relief. However, regulatory attitudes toward the capital treatment of securitizations have changed dramatically in the credit crisis. As a result, the final rules:

  • Repeal the existing provision that permits banks to disregard consolidation of ABCP conduits for risk-based capital purposes
  • Provide no permanent relief from increases in risk-based capital requirements resulting from consolidation of formerly qualifying SPEs
  • Provide no relief from the leverage ratio impact from consolidation of conduits or formerly qualifying SPEs
  • Do not permit the internal assessment approach (IAA) designed for conduit exposures under the Basel II advanced approaches to be applied to assets of consolidated conduits1
  • Reserve authority for the agencies to require that banks hold capital against securitizations that are not consolidated under the new standards, if the risk to the banks justifies that requirement.

The agencies’ August release on this topic also raised some questions relating to the capital impact of participation in the US Treasury's Home Affordable Mortgage Program (HAMP). Specifically, the agencies asked whether receipt of HAMP incentive payments would be likely to lead to consolidation of the related VIEs and, if so, whether regulatory capital should be required for the consolidated assets. Those who commented on the August release generally did not think that incentive payments under HAMP would independently trigger consolidation under FAS 167. The agencies agreed and, on that basis, did not address the risk-based capital treatment in the unlikely event that consolidation was triggered.

Acknowledging that the increased capital requirements come at an unfortunate time in the economic cycle, the agencies provide an optional transition period for complying with the increased capital requirements resulting from the accounting changes. These are the main stipulations for the transition period.    

  • During an optional two-quarter delay, through the end of the second quarter after the implementation date for the accounting changes for a particular banking organization, the organization:
    • need not hold risk-based capital against assets of VIEs that are newly consolidated as a result of the changes (or assets of ABCP conduits that were previously consolidated but excluded from risk-based capital in reliance on the option that is being removed by the final rules); and
    • may include in its tier 2 capital 100 percent of the allowance for loan and lease losses (ALLL) relating to such assets.
  • During an additional optional two-quarter phase-in, a banking organization that has opted for the delay described above:
    • need not hold risk-based capital against 50 percent of the risk-weighted assets in the subject VIEs; and
    • may include in its tier 2 capital 50 percent of the ALLL relating to such assets, notwithstanding the limit otherwise applicable to including ALLL in tier 2 capital.

However, the transitional relief is not available with respect to any VIE for which the banking organization has provided implicit support. 

A banking organization that chooses to implement the optional transition mechanism must apply it to all relevant VIEs. The effect of the transition mechanism on a banking organization’s risk-based capital ratios would be reflected in the regular quarterly reports during the transition period.

The final rules will take effect 60 days after they are published in the Federal Register (which will not happen until they have been approved by the other Federal bank regulators), but the optional exclusion and phase-in periods will run from the dates as of which each affected banking organization implements the underlying accounting changes.



1. The adopting release states: “the IAA is applicable exclusively to a banking organization’s exposures to off-balance sheet ABCP programs and not to a program’s underlying assets when reported on balance sheet.”