FDIC Board Moves Forward Securitizations, Bank ‘Funeral Plans’

BusinessWeek May 11, 2010 (Bloomberg) — The Federal Deposit Insurance Corp. advanced a proposal aimed at overhauling part of the $4 trillion asset-backed securities market and introduced a rule that would require the biggest U.S. banks to submit “funeral plans” to handle their possible collapse.

The Federal Deposit Insurance Corp. plans to advance risk-retention and disclosure rules for the $4 trillion asset-backed securities market amid banking-industry criticism that the changes will restrict credit and hurt firms.

The FDIC board today will consider requiring sellers to retain 5 percent of credit risk to win a so-called safe harbor that protects securitized assets against seizure in the event of a bank failure, making the bonds more attractive to investors. The proposal aims to bring transparency and stability to a market whose collapse triggered the 2008 financial crisis.

JPMorgan Chase & Co.Bank of America Corp. and industry groups including the Mortgage Bankers Association and the American Securitization Forum have pushed the agency to scrap or tone down the proposal since it was released for public comment in December, saying it could damp recovery from the worst economic slump since the 1930s.

“The proposed seasoning and retention requirements would likely have significant unintended consequences on the availability of credit in the home-finance market and expose banks to additional interest-rate risk,” said Adam Gilbert, a managing director at JPMorgan, in a letter filed during the comment period that ended Feb. 22.

Comptroller of the Currency John Dugan and Office of Thrift Supervision acting director John Bowman, both members of the FDIC’s five-person board, cited similar concerns when the panel voted to seek comment on the measure. The proposal is similar to steps being considered by Congress and the Securities and Exchange Commission.

Investor Confidence

FDIC Chairman Sheila Bair has said the new rules — which may bar securitization of home loans that are less than a year old or don’t document borrower income — are needed to restore investor confidence. FDIC action on the measure today will initiate another comment period.

The House in December passed a bill that included 5 percent risk-retention and the Senate is considering similar language in its ongoing debate. The SEC last month approved a proposal that would require financial firms to hold 5 percent of each class of an asset-backed security to avoid regulatory hurdles when selling the bonds.

Asset-backed debt was among the largest sources of more than $1.7 trillion of writedowns and credit losses at the world’s largest financial companies since the start of 2007, according to data compiled by Bloomberg.

BusinessWeek (Bloomberg), link.
Earlier report, BusinessWeek (Bloomberg), FDIC Weighs Risk-Retention Requirement for Sellers of Asset-Backed Bonds, link.
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