Here’s an interesting thought — what with all the recent concern over FDIC funding. Could the organisation, responsible for insuring US bank deposits, start seizing securitised assets to help offset the cost of a multitude of failed financial institutions?
From Asset-Backed Alert:
S&P is temporarily curtailing the volume of new ratings it assigns to asset-backed bonds issued by banks.
The retreat appears focused on credit-card securities, given their prevalence among bank-issued transactions. However, the agency still plans to grade a few such deals in the near term.
At issue is a longstanding lack of clarity about how bank insolvencies might play out after Jan. 1, when banks must start booking securitized assets on their balance sheets under the Financial Accounting Standards Board’s pending FAS 167 rules. S&P apparently feels that before it gets back to business as usual, it needs to know more about how the FDIC plans to treat bond collateral tied in those scenarios.
The agency, like many other players in the securitization industry, is concerned that the FDIC could seize securitized assets to re-pay other creditors of failed banks.
Accounting standard FAS 167, you’ll recall, was adopted by the US accounting standards board, FASB, in June and is due to come into effect next year. The rule effectively eliminates Qualifying Special Purpose Entitities (QSPEs) — the much-maligned off-balance sheet vehicles.
The new rules, S&P seems to suggest, have created a bit of uncertainty over what happens to QSPE-contained assets from next year, in the event of a bank’s bankruptcy. We should note, however, that lobbying groups are already hastening to suggest alternatives to FDIC-seizure:
The American Securitization Forum is working on the issue. Officials from the trade group have met with FDIC representatives to discuss their concerns, and proposed two potential fixes in a Sept. 17 letter. One entails a “sale approach” that would require an FDIC agreement not to “reclaim, recover or recharacterize” securitized assets in a bank insolvency. The other, deemed a “security interest approach,” would allow seizure of securitized assets, but only if bondholders receive compensation equivalent to the principal and interest they are owed. It’s unclear whether the FDIC will adopt either suggestion.
Meanwhile, other ratings agencies are lambasting S&P for being so darn cautious.
In any event, the thought is that securitizations completed this year will remain exempt from FDIC action even after the FASB rules take effect. That has left some people puzzled over why S&P is acting now. “We’re still of the belief that you’re still protected by the grandfather clause,” the rival rating-agency executive said. “We’re not sure what [S&P is] thinking.”
Given FDIC’s urgent funding needs — now available in memo-form — perhaps S&P have caught an early whiff of FDIC desperation?
Related links:
Bringing it back (on balance sheet) – FT Alphaville
FDIC, the ‘F’ stands for… – FT Alphaville
FDIC insurance, inspected – FT Alphaville