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FDIC Federal Register Citations

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FLEETBOSTON FINANCIAL CORPORATION

Ms. Jennifer J. Johnson
Secretary
Attention: Docket No. R-1156
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551

Mr. Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429

Office of the Comptroller of the Currency
Attention: Docket No. 03-21
250 E Street, SW
Public Information Room
Mail Stop 1-5
Washington, DC 20219

Regulation Office
Chief Counsel’s Office
Attention: No. 2003-48
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552

Re: Interim Capital Treatment of Consolidated Asset-Backed Commercial Paper Program Assets

Ladies and Gentlemen:

FleetBoston Financial Corporation (“FleetBoston”) sponsors asset-backed commercial paper conduits (“ABCP”) that are important tools used to serve our customers’ financial needs. They serve as funding alternatives for our customers’ assets and allow us to transact certain types of risk management activities for our customers. As such, we appreciate the opportunity to comment on the U.S. bank supervisory agencies’ (“Agencies”) interim final rule (“IFR”) on the risk-based capital treatment of consolidated ABCP assets.

In response to recent abuses of special purpose entities (“SPE”) where assets and liabilities were moved off corporate balance sheets without the appropriate transfer of risk, the Financial Accounting Standards Board (“FASB”) has reacted by issuing Interpretation No. 46 on the Consolidation of Variable Interest Entities (“FIN 46”). It is important to note that our industry’s use of ABCP conduits in the service of its customer base has not been questioned. Further, we feel that the impact on banks is not reflective of the true economic exposures.

In our view, the implementation of FIN 46 does not change any of the underlying economics or risks of ABCP conduits or a bank’s risk profile; it is only a change in the accounting treatment of this activity. Also, the current regulatory capital rules already require that any risk retained by a sponsoring organization be assessed capital. Consequently, a bank’s regulatory risk-based capital ratios should remain unchanged, which is the general result of the IFR. In addition to supporting this action, we would go a step further and make this a part of any final rule until superceded by the U.S. version of Basel II.

Our one major concern with the IFR is its reduction of a bank’s tier 1 leverage ratio, which is caused by reflecting the impact of FIN 46, and is inconsistent with risk-based capital portion of the proposal. With a large enough decline in the leverage ratio, we believe there is the potential for triggering prompt and corrective action (“PCA”) with no underlying deterioration in a bank’s soundness. Therefore, we strongly recommend that any FIN 46 effects be removed from the tier 1 leverage calculation (i.e., a treatment that is consistent with the risk-based capital calculations).

Our reasoning is based on the fact that neither the tier 1 leverage ratio nor FIN 46 is a true measure of bank safety and soundness. First, the level of balance sheet assets supported by tier 1 capital is an imprecise if not totally misleading measure of risk and therefore of a bank’s soundness. For instance, the addition of low-risk assets, such as ABCP assets, to the balance sheet has the same impact on the leverage ratio as the addition of the same amount of risky “B-rated” commercial loans. As the preceding example points out, the leverage ratio is not a very risk-sensitive measure and one that has little relevance to the safety and soundness of an institution. Granted this issue exists in the current environment, but since exceptions are being proposed for the FIN 46 impact on risk-based capital ratios, we believe it should also apply to the leverage ratio.

Secondly, the FIN 46 requirement to consolidate an ABCP conduit with little risk transference overstates the risk profile of a bank. For example, is it less risky for a corporate borrower to fund assets on its balance sheet using commercial paper issued in its own name but supported by a bank back-up facility, versus the borrower selling those same assets to an ABCP conduit, which is also funded by commercial paper and supported by a bank back-up facility? We would argue that the conduit is actually less risky because of the mitigants embedded in the structure, but the conduit assets nonetheless are recognized on the bank’s balance sheet implying a greater riskiness. The Agencies have recognized this issue in the risk-based capital calculations, and we urge the same treatment be given the leverage ratio.

In conclusion, we support the Agencies removal of any impact of FIN 46 from regulatory risk-based capital ratios because an institution’s risk profile remains unchanged as a result of this accounting recognition. In fact, this treatment should be permanent until the implementation of the U.S. version of Basel II. Our major concern is that FIN 46 will lower a bank’s tier 1 leverage ratio, which conveys misleading risk-profile information. We feel that FIN 46 should cause no change in the leverage ratio, which is accomplished by removing any non-economic, accounting effects from its calculation.

FleetBoston is prepared to provide further input to the Agencies’ deliberations on this topic. Please contact Thomas Loeffler (617-434-7501 or thomas_h_loeffler@fleet.com) or William Schomburg (617-434-6158 or william_h_schomburg_iii@fleet.com) with further questions or comments.

Sincerely,

/s/ Joseph R. Dewhirst 

Joseph R. Dewhirst
Senior Vice President and Treasurer
FleetBoston Financial
 

Mr. Jack Hall
Examiner in Charge
Office of the Comptroller of the Currency
℅ FleetBoston Financial Corporation
Mail Stop MA DE 10304N
100 Federal Street
Boston, MA 02110

Mr. Timothy MacDonald
Directing Examiner
Federal Reserve Bank of Boston
FleetBoston Financial Corporation
Mail Stop MA DE 10304N
100 Federal Street
Boston, MA 02110

 

Last Updated 11/17/2003 regs@fdic.gov

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