Securitisation rules

Published: December 21 2009 09:26 Last updated: December 21 2009 09:26

Grappling with unintended consequences is like stuffing the proverbial genie back in its bottle. Accounting rule changes in June, which will see US banks bring securitisations back on balance sheet at the turn of the year, prompted concerns that those assets could be commandeered by the Federal Deposit Insurance Corporation as part of resolving bank failures. Loss of so-called “safe harbour” protection, warned rating agencies, could mean downgrades of bank-originated securitisations and deter new issues. So this week, the FDIC confirmed that assets securitised before the end of March would remain safe from seizure. Meanwhile, it wants feedback on possible rules that would determine whether future deals are protected.
Rather by the backdoor, then, the FDIC adds another voice on reform of securitisation markets. Coordinating its elaborate list of possible conditions with the US legislative process is a priority, as should be ensuring consistency internationally. Differing standards could drive securitisation activity from deposit-takers to non-bank or non-US institutions. The preliminary nature of the FDIC’s thoughts reflects, too, some disagreement between regulators, meaning an extension to the March deadline appears likely. Prolonged uncertainty is not ideal. But for consumer credit-backed securities, at least, the FDIC’s possible rules chime with what has been proposed elsewhere.
However, new FDIC suggestions – which may be restricted to only residential mortgages – include a six-tranche limit in capital structures, a requirement to hold loans for 12 months before they are securitised, and a portion of deal fees paid over time. True, the mortgage-backed securities market spawned the most complex structures and worst performance of pre-crisis issuance. But these strictures could make securitisations less viable in a market that, still, remains closed. They also smack of rear view regulation, before the new rules are in place to prevent the next one.