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Financial Institution Letters

Notice of Proposed Rulemaking Regarding Risk-Based Capital: Impact of Modifications to Generally Accepted Accounting Principles, Consolidation of Asset-Backed Commercial Paper Programs, and Other Related Issues


The federal banking agencies (Agencies) are requesting comment on a proposal to better align capital requirements with the actual risk of certain exposures and obtain public comment on the effect on regulatory capital that will result from the implementation of the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (FAS 166), and Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167), on consolidation of variable interest entities (VIEs). The agencies will accept comments on the Notice of Proposed Rulemaking (NPR) for 30 days after its publication in the Federal Register.


Under generally accepted accounting principles (GAAP), the treatment for structured finance transactions involving a special purpose entity (SPE) has been governed by the requirements of Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 140), and FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities (FIN 46(R)). Under FAS 140, when certain conditions are met, transfers of assets by a bank to an entity that meets the definition of a qualifying special purpose entity (QSPE) are recognized as sales, which permit the bank to remove the assets from its balance sheet. In addition, FIN 46(R) specifically excludes QSPEs from its scope despite the fact that many QSPEs would have otherwise been deemed VIEs subject to possible consolidation.

On June 12, 2009, the FASB finalized modifications to FAS 140 and FIN 46(R) by issuing FAS 166 and FAS 167, which are effective in 2010. Among other things, FAS 166 and FAS 167 remove the concept of a QSPE from GAAP and alter the consolidation analysis for VIEs, thereby requiring banks to consolidate many VIEs that are not consolidated under current GAAP standards.

As a result of the implementation of FAS 166 and FAS 167, the categories of securitization and structured finance exposures now off-balance sheet that are likely to be subject to consolidation on the balance sheet of the originating or servicing bank include: certain asset-backed commercial paper (ABCP) conduits; certain private-label mortgage loan securitizations; certain term loan securitizations in which a bank retains a residual interest and servicing rights, including some student loan and automobile loan securitizations; revolving securitizations structured as master trusts, including credit card and home equity line of credit securitizations; and certain tender option bond trusts that were designed as QSPEs.


The agencies believe that the broader accounting consolidation requirements implemented by FAS 166 and FAS 167 will result in a regulatory capital treatment that more appropriately reflects the risks to which banks are exposed. The agencies' NPR proposes to amend the risk-based capital rules to:

(1) Eliminate the exclusion of certain consolidated ABCP program assets from risk-weighted assets, and

(2) Provide a reservation of authority to permit the agencies to require banks to treat structures that are not consolidated under the accounting standards as if they were consolidated for risk-based capital purposes, commensurate with the risk relationship of the bank to the structure.

The NPR requests public comment on the regulatory capital impact of FAS 166 and FAS 167, including, with respect to the types of VIEs a bank must consolidate, the features and characteristics of securitization transactions or other transactions with VIEs and other special purpose entities that are more or less likely to cause a bank to provide implicit support, and the effect of FAS 166 and FAS 167 on a bank's financial position, lending, and activities.

In addition, as an option to the proposal, the NPR presents a framework that would provide an incremental phase-in of the increase in banks' capital requirements resulting from the implementation of FAS 166 and 167, the NPR solicits comment as to whether the Agencies should consider such a phase-in for purposes of any final rule. And finally, comments are requested on whether securitized loans that remain on the balance sheet should be made subject to the same loan loss provisioning process that is applied to similar loans that are not securitized, as well as comment on the impact of FAS 166 and FAS 167 on federal regulatory reform initiatives involving the securitization markets (such as proposals that require securitizers to retain a percentage of the credit risk), and the consolidation analysis for servicers participating in the U.S. Department of the Treasury's Making Home Affordable Program.

Last Updated 8/27/2009

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