The Federal Deposit Insurance Corp. (FDIC) will be holding a meeting on Nov. 12 to discuss a proposed memorandum and resolution related to the safe harbor regulation it issued in 2000.
At the meeting, the FDIC is expected to deliver a proposal that will have language regarding the grandfathering of existing deals under the safe harbor rule, according to the American Securitization Forum (ASF). The securitization trade group has submitted two proposals to the agency. The most recent proposal carries a potential Sale Approach and a Security Interest Approach.
The safe harbor regulation covers the FDIC's treatment as conservator or receiver of financial assets transferred by an insured depository institution in relation to a securitization.
Under the current safe harbor regulation, a financial institution is required to treat a securitization as a sale for the Generally Accepted Accounting Principles (GAAP) purposes for the FDIC to treat the securitization as a legal sale when the FDIC acts as a conservator or receiver for insolvent banks.
FAS 166 implementation (GAAP standards for transfers, including securitizations, of financial assets) is expected to result in the consolidation of many off-balance sheet structures, such as credit card ABS. This, according to Bank of America Merrill Lynch analysts, calls into question a securitization's legal isolation.
Analysts think that some form of acceptable comprise will be achieved. If not, they would expect considerably lower demand for and wider pricing on consolidated deals that can no longer achieve legal isolation under the safe harbor rule. This is why banks could lose an important funding source that would cause them to limit the availability of credit to consumers and businesses, BofA Merill analysts said.
Meanwhile, the rating agencies have indicated they might lower the ratings on bank-sponsored ABS that have no favorable resolution. Additionally, BofA Merrill analysts think the safe harbor issue has kept several credit card issuers out of the ABS market in the past several weeks.
If the FDIC grandfathers existing deals, analysts think it needs to grandfather not only existing series issued by a credit card trusts, but future series issued by the same trusts as well. This so that, according to analysts, these trusts can still finance receivable growth and maturing deals.
Additionally, analysts believe there is a chance that the FDIC looks at the ability to change existing structures as its develops new regulations.
This Board meeting will be on Web cast live through the Internet and would be made available on-demand one week after the event, BofA Merrill analysts reported.