Federal banking regulators issued a ""final risk-based capital rule"":http://www.fdic.gov/news/news/press/2010/pr10012a.pdf last week outlining how lenders are to account for assets, including mortgages that have been repackaged and sold to investors.[IMAGE]
Mortgage-backed securities (MBS) and other asset-backed securities (ABS) had previously been excluded from banks' balance sheets, but new accounting standards adopted by the ""Financial Accounting Standards Board"":http://www.fasb.org (FASB) Ã¢â‚¬" namely FAS 166 and FAS 167 Ã¢â‚¬" force lenders to move these securitized assets back onto their books.[COLUMN_BREAK]
For years, banks have been able to sell bundled mortgages in the secondary market and essentially pass the debt and the risk associated with it off to investors. Not only do the new accounting rules mean banks must retain some of the risk associated with these loans, but it raises capital requirements to cover potential losses from the assets.
With the final guidance issued last week, regulators are giving banks a little breathing room to come into full compliance.
FAS 166 and FAS 167 took effect January 1, but bank supervisors say lenders have the option of excluding risk-based capital and allowances for lease and loan losses related to residential MBS, commercial MBS, and other securitized loans for the first two quarters of 2010. Banks can use the next two quarters as a phase-in period, in which they are allowed to include only 50 percent of their securitized assets in risk-based capital and loss reserve calculations.
The final rule was issued by the Office of the Comptroller of the Currency, Federal Reserve, FDIC, and Office of Thrift Supervision.
The agencies said in a joint statement, Ã¢â‚¬Å“The rule better aligns risk-based capital requirements with the actual risks of certain exposures.Ã¢â‚¬Â