The Gift that Keeps on Giving

Last June, the Financial Accounting Standards Board (FASB) adopted enormous changes in the rules to securitization accounting rules in the form of FAS 166 (amends the treatment of transfers of financial assets under FAS 140) and FAS 167 (amends the consolidation treatment of variable interest entities, or VIE). The aspiration propelling these changes was to bring securitizations (the qualifying special purpose entities, or Qs) back onto balance sheets. The amendments are presently being implemented for 2010 financial reports (specifically, fiscal years beginning after November 15, 2009), so Q1 filings should provide the first solid glimpse of their impact on US public companies (deliberate choice of words – they were written for all transferors of financial assets and parties to VIEs – not just banks). In the meantime, they’ve spun off regulatory conundrums and caught some innocent entities (innocent anyway of having ever been securitization Qs) in their net. Moreover, now that likely consolidators have had some months to sift through the impact of bringing securitized loans and other receivables on balance sheet, it’s clear there are knock-on effects that go beyond simply grossing up assets and liabilities. Indeed, the amendments are like a gift that won’t stop giving – and if you lost track of all the posting, bloggings and news flashings they’ve occasioned, we’re here to help. Once again the sink is filled with topics: regulatory risk-based capital (RBC) requirements for banks, protecting asset-backed investors in the event of a Federal Deposit Insurance Corporation (FDIC) takeover, rolling mutual funds into their managers’ financial statements and removing a costly obstacle to GSE loan modifications. So let’s roll up our sleeves, pull on the rubber gloves and start scrubbing. Ballooning Bank Capital Requirements While the standards now known as FAS 166 and 167 were still in the drafting phase, there was hope consolidated assets might not be included in banks’ RBC requirements. After all, analysts reasoned, banking regulators had exempted banks from counting consolidated asset-backed commercial paper (ABCP) programs toward RBC when a 2004 change to GAAP required consolidation of certain ABCP conduits. It wasn’t to be. Last June, the Federal Reserve greeted the publication of FAS 166 and 167 with a press release putting banks on notice that RBC requirements were under review in light of the impending consolidation requirement. It explicitly advised banking organizations to take the full impact of the amendments into account in any internal capital planning activities. Regulators followed through with a notice of proposed rule-making (NPR) on August 26, 2009. (It was published in the Federal Register September 15, 2009, with a comment period to October 15, 2009.) The joint rule-making would modify capital adequacy guidelines promulgated by the OCC (Treasury Office of the Comptroller of the Currency), the Federal Reserve, the FDIC and the OTS (Treasury Office of Thrift Supervision). As anticipated, the proposed rule would require banks and thrifts (with consolidated assets of $500 million or more) to include in their risk-weighted assets any securitized assets consolidated according to GAAP. The proposed rule also would expand regulators’ authority to require banks to include in RBC, commensurate with the actual risk relationship, the assets of SPEs and VIEs that they sponsored but do not have to consolidate under GAAP. Clearly regulators are concerned that FAS 167 might not return a securitization to its sponsor’s balance sheet. They also recognized that future securitizations could specifically be designed to evade consolidation. (Indeed, Question 1 for comments in the NPR was “What types of VIEs will banking organizations have to consolidate … which types are not expected to be subject to consolidation, and why?”) TO READ THE FULL STORY, SUBSCRIBE NOW.