The risk-based capital guidelines that will be in effect Jan. 1 could increase the use of net-interest margin (NIM) securitizations and other residual sale mechanisms, according to industry players.

"This is only really going to be a phenomenon for those banks that presently have residuals on their balance sheets that approach or exceed 25% tier one capital, and that's just a handful of banks," said Marty Rosenblatt, head of the ABS practice leader at accounting firm Deloitte & Touche.

There are as many as 20 banking institutions that might need to address the 25% tier one capital sublimit.

Other than NIMs, issuers might opt to outright sell the residual, although the economics in doing that might not make sense, as the banks could be booking a loss on the securitization. Also, banks might start doing a portion of their securitizations as on-balance-sheet financings, so that there is no gain-on-sale residual created.

Although some institutions might choose synthetic net-interest margin type mechanisms, such as Provident Bank's Sherpas (see ASR 4/30/01), to reduce their capital requirements, this type of transaction would probably not help to reduce the size of the residual, as it is not actually transferred off balance sheet. However, it is likely that, to a certain extent, there will be a new generation of custom-tailored synthetic transactions, specifically addressing aspects of the new risk-based capital and residual rules, a bank researcher said.

These won't come for some time, though, as there is a grandfather period of a year for existing transactions.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.