The Federal Deposit Insurance Corp. (FDIC) will take another stab today at imposing checks on securitization.
The agency is expected to issue another proposal that would restrict its safe harbor for securitized assets, five months after its first attempt, during which the Securities and Exchange Commission weighed in with a plan of its own.
Officials are also scheduled to consider new reporting and planning requirements for large banks to help the FDIC prepare for a hypothetical failure.
Observers said the new securitization proposal will need to be crafted carefully to work in concert with the SEC measures as well as proposed legislation requiring originators to retain a piece of loans they
Tom Deutsch, the executive director of the American Securitization Forum, said the FDIC may choose to focus more on the types of securitizations receiving the safe harbor than requiring stronger disclosure for investors, which was a key aspect of the SEC proposal.
"Certainly, disclosure is squarely within the bailiwick of the SEC, and I think there's going to be significant reliance from the FDIC on what the SEC does related to disclosure," Deutsch said. "But in addition to the changes the SEC is proposing, the FDIC is proposing a number of structural constraints for securitizations, including minimizing tranching, variations of risk retentions and variations on compensation for transaction parties."
At issue is whether the FDIC can seize the underlying asset backing a securitization after a bank failure. For years the agency has exempted such assets from the receivership process, giving investors comfort
that they can have access to the asset if the securitization was done off the balance sheet.
But that policy was voided by new accounting rules last year requiring banks to move such deals on the balance sheet. The FDIC, citing securitization's role in the crisis, has allowed the safe harbor to
continue temporarily while it develops long-term restrictions.
In December, the agency asked for comment on how to proceed in lieu of issuing a proposal that, while supported by FDIC Chairman Sheila Bair, drew objections from other board members.
Instead, the FDIC floated a sample proposal calling for a 5% retention requirement and enhanced disclosures. For certain deals, fees would have to be paid over time, loans could not be securitized sooner than one year after origination and a securitization would be limited to six tranches.
But despite the gentler step, the industry did not react well, arguing the sample proposal could seriously harm the secondary market.
A main concern from bankers was that the SEC was working on its own rule and lawmakers, who had inserted provisions for a retention requirement in the financial overhaul package, were far from
finalizing the bill. The regulatory reform bill from Senate Banking Committee Chairman Chris Dodd includes a provision that would require originators to retain at least 5% of the risk before selling a securitization.
But the agency has likely tweaked its approach based on the work of others, observers said. The SEC proposal, issued last month, would force lenders to retain at least 5% of the credit risk for
asset-backed securities, give investors more time to consider securitization deals and require that disclosures contain more information about the underlying assets in a securitization.
"The FDIC still plans to steam on," said Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc. There will be "some changes in the [FDIC] proposal to conform to the SEC proposal in
terms of risk retention and disclosures."
Deutsch said he is hopeful the FDIC's rulemaking will be more palatable to the industry than the earlier sample proposal.
"I'm sure they've been doing a lot of coordination between the two agencies," he said.
"The SEC is very focused on disclosure-related issues," he said. "The FDIC is very focused on structural areas. They've gotten a lot of comments, and I would expect that they would certainly have digested
and reacted to a lot of those comments. Hopefully, that should make the revised proposal more amenable for investor interests."