Stranded assets, dealer floorplan, rental car, franchise, aircraft and container ABS should be treated as corporate and not as securitized risks. As such, these assets should not be subject to hefty risk-based capital charges, said a Citigroup Global Markets report today.
The leverage, risk profile and economic substance of these structures are at odds with securitization regulatory definitions, the bank said.
According to the joint U.S. regulatory agencies’ rules, exceptions to these three factors would appear to disqualify these sectors from being considered as securitizations.
Risk-based capital requirements would rise 100% for banks holding these structures as securitization positions once new accounting regulations take effect on January 1, 2013.
These transactions are vulnerable to the dramatic spike in risk-based capital holdings because they do not conform with the classic consumer ABS structures, performance measurement and regulatory definitions.
However, Citi analysts said that these off-the-run securitizations more closely resemble Europe's equipment trust certificates, which U.K. regulators already accept as corporates for regulatory capital purposes.
"The U.K.’s FSA classifies [enhanced equipment trust certificate or EETC securities] (which employ securitization technology) as corporate securities." analysts said in the report. "This viewpoint appears to affirm our assessment that the economic substance of these structures is more corporate bond-like than securitization-like."
Analysts warned that dealers would stop trading in these sectors if the risk-based capital costs were to spike, which would ultimately drive up the cost of doing business for the affected entities and their customers.