On August 26, 2009, the US Federal bank regulators released a notice of proposed rulemaking (NPR) that responds to recent changes in US accounting standards for securitizations (see our June 22, 2009, Client Update “Big Changes to Securitization Accounting”). Under 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); and
- 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 towards the capital treatment of securitizations have changed dramatically in the credit crisis. As stated in the NPR: “the agencies believe that the broader accounting consolidation requirements implemented by the 2009 GAAP modifications will result in a regulatory capital treatment that more appropriately reflects the risks to which banking organizations are exposed.”
As a result, the NPR proposes:
- Repeal of the existing provision that permits banks to disregard consolidation of ABCP conduits for risk-based capital purposes—the NPR does not discuss how (if at all) the internal assessment approach available for conduit exposures of qualifying banks under the Basel II advanced approaches may be modified to apply to on-balance sheet assets;
- No permanent relief from increases in risk-based capital requirements resulting from consolidation of formerly qualifying SPEs;
- No relief from the leverage ratio impact from consolidation of conduits or formerly qualifying SPEs; and
- A reservation of authority 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 acknowledge that the increased capital requirements come at an unfortunate time and request comment as to possible adverse impacts on credit extension and economic recovery. They also discuss the possibility of a transition period to mitigate any such impacts (with specific discussion of a phase-in over four quarters) and request comment on the details of any such transition. Comments are also requested on several other matters, including the treatment of securitized loans in the allowance for loan and lease losses and the current limit on the amount of provisions that count as Tier 2 capital.
The NPR provides only 30 days for comments, commencing when the NPR is published in the Federal Register.