Annals of unintended consequences, FDIC and FAS 166/7 edition | FT Alphaville

Annals of unintended consequences, FDIC and FAS 166/7 edition

In September, FT Alphaville posed the question: could the FDIC start seizing securitised assets to help offset the cost of dealing with failed banks?

At the heart of the question is uncertainty over how the soon-to-be-implemented FAS 166 and 167 will affect the treatment of securitised assets held by banks in receivership, as well as any new and existing structured securities.

Analysts at BarCap argued the implications of FAS 166 and 167 could be “material”. As they explained (emphasis FT Alphaville’s):

The new accounting rules will effectively remove the true sale treatment of assets in a securitization trust and force consolidation of the assets onto the balance sheets of entities as provided for in FAS 167. Because of the loss of sale accounting treatment, the FDIC could, in theory, go after these assets, which were once shielded by the safe harbor provision of the FDIC’s Securitization Rule, in the event of a bank sponsor’s insolvency. While we expect that the FDIC will clarify the rule to address the market’s concern, a delay in, or outright lack of, action has the potential to severely roil the market for bank issued securitizations.

While a variety of asset classes and issuers will be affected by the new accounting rules, insured depositary institutions (eg, banks) that issue ABS face an additional concern with respect to the FDIC and the loss of GAAP sale treatment. On August 11, 2000, the FDIC issued “Treatment by the Federal Deposit Insurance Corporation as Conservator or Receiver of Financial Assets Transferred by an Insured Depository Institution in Connection With a Securitization or Participation”, commonly referred to as the FDIC’s Securitization Rule. The Securitization Rule provided clarity regarding the powers of the FDIC as conservator or receiver with respect to financial assets transferred in a securitization; provided the securitization is accounted for as a sale for GAAP purposes, the FDIC will also treat the transferred assets as sold when the agency acts as conservator or receiver of a failed bank.

Implementation of FAS 166/7 eliminates GAAP sales in securitizations, thereby potentially putting securitized assets at risk of seizure by the FDIC in cases of conservatorship or receivership. It should be noted that the elimination of sale treatment is prospective; securitization transactions completed prior to implementation of FAS 166/7 will continue to be accounted for as sales, even though they must be consolidated. Therefore, only new securitizations from bank sponsors will be at risk, with the exception of credit card master trusts. Issuance from such trusts after FAS 166/7 implementation (ie, January 1, 2010) will result in loss of true sale for the entire trust, thereby placing the assets in jeopardy.

Regarding credit card trusts, Moody’s said in a report last week the new accounting rules could lead to negative actions on top-rated credit card securities, depending on how the FDIC decides to implement them. As William Black, an SVP at Moody’s, said in the report:

There are a variety of possible outcomes, ranging from full protection from repudiation and stay risk to no protection at all

In the worst case, absent further clarification from the FDIC, we believe that some credit card ABS will be exposed to repudiation and stay risk

Related links:
The junk and treasures of bank failures – The Deal
Securitisations of bank assets: impact of bank insolvencies and related issues – Chapman and Cutler client memo
ASF requests moratorium on risk-based capital changes – AFP 3.0
Bringing it back (on balance sheet) – FT Alphaville