The federal bank regulatory agencies have issued a joint rule in connection with the adoption by the Financial Accounting Standards Board of Statements of Financial Accounting Standards No. 166 and No. 167, which make substantive changes to the rules governing how banking organizations account for securitized assets currently excluded from their balance sheets. The final rule announced on December 16 amends the general risk-based and advanced risk-based capital adequacy frameworks by eliminating the exclusion of certain consolidated asset-backed commercial paper programs from risk-weighted assets. The final rule includes a transition mechanism that allows banking organizations the option to delay implementation for two quarters, followed by an optional two-quarter partial implementation of the final rule. The transition mechanism is optional because it requires a banking organization that chooses the option to prepare and maintain two sets of financial records for special purpose entities affected by the new accounting standards for the duration of the delay and partial implementation periods (to account separately for financial reporting under U.S. generally accepted accounting principles and for regulatory capital reporting). The delay and subsequent phase-in periods of the optional implementation mechanism apply only to risk-based capital requirements, not to the leverage ratio requirement. The final rule is effective 60 days after it is published in the Federal Register, which is expected shortly.
Nutter Notes: FAS 166 and FAS 167, among other things, establish new accounting standards for a transfer of assets to a special purpose entity, known as a variable interest entity (VIE) under GAAP, and for consolidating VIEs. Under FAS 167, banking organizations may be required to consolidate assets, liabilities, and equity in certain VIEs that were not consolidated under the previous GAAP standards. Organizations affected by the new accounting standards generally will be subject to higher minimum regulatory capital requirements. The federal banking agencies’ risk-based capital and leverage rules generally require banking organizations to include assets held by newly consolidated VIEs in their leverage and risk-based capital ratios. As a result, both the leverage and risk-based capital ratios of banking organizations that must consolidate VIEs (that they did not previously consolidate) would be likely to fall by varying amounts due to FAS 167, all other factors remaining constant. The final rule also provides for an optional two-quarter delay, followed by an optional two-quarter partial implementation, of the application of the agencies’ regulatory limit on the inclusion of the allowance for loan and lease losses (ALLL) in tier 2 capital for the portion of the ALLL associated with the assets a banking organization consolidates as a result of FAS 167. Finally, the rule permits the agencies to require banking organizations to treat entities that are not consolidated under accounting standards as if they were consolidated for risk-based capital purposes, commensurate with the risk relationship of the banking organization to the entities.