TO: |
CHIEF EXECUTIVE OFFICER |
SUBJECT: |
Proposed Revisions to the Risk-Based Capital
Treatment of Recourse and Direct Credit Substitutes
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The FDIC Board of Directors is seeking comment on the attached
proposal to make consistent the risk-based capital standards for
two types of credit enhancements - "recourse" arrangements and
"direct credit substitutes." The proposal would also require
different amounts of capital for different risk positions in
asset securitization transactions.
The proposed rule is being issued jointly by the Federal Reserve
Board, the Office of the Comptroller of the Currency and the
Office of Thrift Supervision. The agencies will accept comments
on the proposal through February 3, 1998.
Banks provide credit enhancements to protect investors who
purchase loans and securities from incurring losses. Recourse
arrangements arise when an institution retains all or part of
the risk of loss on an asset or pool of assets it has sold to
another financial institution, a government agency or some other
party. A direct credit substitute is an arrangement, such as a
standby letter of credit or a guarantee, in which an institution
assumes all or part of the risk of loss on an asset or pool of
assets owned by another party, even though the institution had
not owned and sold the asset.
Under the current risk-based capital standards, different
amounts of capital can be required for recourse arrangements and
direct credit substitutes that expose an institution to
equivalent risk of loss. In addition, the standards do not
recognize differences in risks associated with different loss
positions in asset securitizations. To eliminate these
inconsistencies, the proposal would:
- Extend the current risk-based capital treatment of recourse
obligations to direct credit substitutes. For both types of
credit enhancements, this generally would mean that capital
must be held against the entire outstanding amount of assets
that the enhancement supports, except for qualifying
enhancements in asset securitizations that would receive a
more favorable risk-based capital treatment.
- Implement a multi-level approach to capital requirements for
asset securitizations. For positions in securitizations that
are traded, the multi-level approach would base the risk-based
capital treatment on credit ratings from nationally recognized
rating agencies. For positions in securitizations that are
not traded, the proposal presents three alternative approaches
for determining the capital requirements. In general, these
approaches would use ratings from two rating agencies,
benchmark guidelines developed by the banking agencies for
standard securitization structures based on information
available from the rating agencies, and statistical
evaluations of historical loss data.
The proposal would require institutions to maintain higher
amounts of capital against certain direct credit substitutes,
but would reduce the risk-based capital charge for positions in
asset securitizations with the highest credit quality. In
addition, loss positions in securitizations that meet the
proposed criteria would receive a more favorable risk-based
capital treatment than would otherwise apply to recourse
obligations and direct credit substitutes.
The attached Federal Register notice contains a detailed
discussion of the proposed rule and a series of specific
questions for comment. For further information, please contact
Robert F. Storch, Chief of the Accounting Section in the FDIC's
Division of Supervision, on (202) 898-8906.
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Nicholas J. Ketcha Jr. |
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Director |
Attachment: (Available on the FDIC's web site, www.fdic.gov/news)
Federal Register, Nov. 5, 1997, pp 59944-59976.
Distribution: FDIC-Supervised Banks (Commercial and Savings)
NOTE: Paper copies of FDIC financial institution letters may be
obtained through the FDIC's Public Information Center, 801 17th
Street, N.W., Room 100, Washington, D.C. 20434 ((703) 562-2200 or
800-276-6003). Electronic versions are available on the FDIC
web site at: http://www.fdic.gov/news/
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