Amid all the accounting-related chicanery currently taking place, the one below, we think, has been flying rather under the radar.
From Asset-Backed Alert:
U.S. government officials are aiming for September to decide once and for all how banks’ capital reserves should reflect a tidal wave of securitized assets that are headed for their balance sheets.
The landmark ruling, from the FDIC, Federal Reserve, Office of the Comptroller of the Currency and Office of Thrift Supervision, would mark one of the final steps in determining the impact of the Financial Accounting Standards Board’s FAS 167. At issue are the costs issuers incur in tending to huge volumes of already-securitized assets, and when, or if, securitization might re-emerge as a popular funding source.
FAS 167 and 167 were adopted by FASB in June and are due to come into effect in January. They effectively eliminate the qualifying special purpose entities, or QSPEs, that many thought helped fuel the financial crisis, along with automatic off-balance sheet treatment for transfers of financial assets into securitisation entities. In other words, the new standards mean companies will have to bring billions of assets back onto their balance sheets.
Estimates vary as to just how much will be coming back onto those balance sheets under the rules, but it’s not an insignificant amount — probably between $700bn and $900bn. The change also affects varying institutions very differently. Banks like JP Morgan, Citigroup and Bank of America could be more adversely affected. JPM for their part have said the new rule will require them to consolidate $145bn in off-balance sheet assets, and Citigroup has said it foresees circa $166bn coming back onto its balance sheet.
Any assets coming back onto balance sheets will naturally be subject to regulatory capital rules — the thrust of the Asset-Backed Alert story. Capital reserve rules vary according to the type of assets involved of course, but according to the ABA article we may be looking at something along the lines of the straight 8 per cent requirement under US rules. That means, for instance, the $145bn estimate by JPM would require some $11.6bn in additional capital for the bank.
Thus, the question as to whether there will be any leniency on the capital front for the new on-balance sheet assets will be key for FAS 166 and 167-affected banks.
Back to ABA:
The fact that the government is even weighing in on the matter is giving market players hope of some sort of reprieve. Indeed, the efforts appear geared toward lessening the immediate impact of FAS 167 from a capital-adequacy standpoint, as many banks have already struggled to keep their capital reserves at appropriate levels amid the global financial crisis. The government has also sought to ensure that financial institutions can continue to fund themselves through securitization.
However, nobody is suggesting that banks be completely spared from setting aside additional capital as a result of FAS 167. A more likely scenario would be a gradual phase-in of full capital-adequacy requirements, giving the institutions more time to raise the necessary money. That said, the government’s plans are murky. Members of the American Securitization Forum met with Fed officials last week to discuss the matter, but walked away without much insight on the central bank’s stance.
In testimony to the U.S. Senate Finance Committee last week, FDIC Chairman Sheila Bair said banks would ultimately have to hold capital against the newly on-balance-sheet receivables. She also expressed fears about what such a shift would do to the still-vulnerable market. “If more assets are coming on-balance-sheet, capital levels are going to be impacted accordingly,” she said in response to a question from Sen. David Vitter (R-La.).
“We support the general direction of bringing all this back on-balance-sheet.” she added, noting that the timeline for implementing FAS 167 “still gives me some heartburn.”
Related links:
Quo vadis QSPEs – FT Alphaville
Beware the off-balance sheet return – FT
Do new accounting rules force banks to use new playbook? – HousingWire