Eligible liquidity to draw 10% risk weight in final rules

In its final iteration of its ABCP risk-based capital guidelines, the Federal Deposit Insurance Corp. lowered the eligible liquidity conversion factor to 10% from the 20% it proposed last fall. Industry pundits were pushing for 7%.  Also, the FDIC has decided not to include final guidance on capital against securitized revolving credits with early amortization provisions (such as credit cards), but will readdress this issue through the implementation of Basel II.

A final draft of the rules was circulated during a discussion in Washington on Monday. The rest of the FFIEC regulators are expected to follow course. The rules, which have yet to be published to the Federal Register, will take effect Sept. 30.

As in the initial proposal, for rated assets, the liquidity facility will be converted against the underlying asset, such that a facility supporting a triple-A exposure will be converted to 10%, per the new rules, and "assigned to the 20% risk weight category" for the underlying triple-A.

The FDIC also modified the criteria for eligible liquidity facilities, which have been, and may still be viewed as too stringent (see ASR 6/14). Up front, the regulators have extended the past due asset quality test, which determines how long an asset can be past due before it is written down and no longer fundable by liquidity. Eligible liquidity will be able to fund assets 90 days past due, as opposed to the 60 days proposed last fall. Also, assets with embedded government guarantees, such as FFIEC student loans, are not subject to the past due asset quality test.

The regulators are holding firm on the "non-investment-grade" restriction, which precludes eligible liquidity from funding an asset that has been downgraded below investment grade. As with the asset quality test, government guaranteed credits are subject to this rule.

Eligible facilities with maturities greater than one-year are subject to a 50% risk conversion. Non-eligible facilities are considered a recourse obligation or a direct credit substitute, and subject to 100% risk conversion.

Last fall's notice of proposed rulemaking (NPR), which provided interim guidance, was viewed by some as a relief package to the conduit industry, as it excluded conduit assets consolidated as a result of FIN 46 from the risk-based capital analysis. However, if a bank sponsor is including the assets and liabilities of the ABCP on its balance sheet, and is including these in its risk-based capital analysis, liquidity facilities associated with the conduit would not be subject to capital risk weighting.