Bank Regulation on Securitization
Due to the passing of the Dodd-Frank Bill it is clear that tighter rules for securitization are right around the corning. Many agencies are concerned an uneasy about this new legislation.
At worst, government efforts to rein in issuers of asset-backed securities could produce three separate regulations, each with its own elements. While the three rules would all largely do the same thing — strengthening disclosure and requiring issuers to retain 5% of the credit risk from a securitization — they have significant differences. A 5% requirement will cause for Bank pricing to increase and will be passed on to the consumer as a trickle down effect.
In an interview Cristeena Naser, a senior counsel for the American Bankers Association said, “When there are all these balls up in the air, you can’t expect businesses to make systems changes … until the dust settles. They need to be coordinated. Nobody is saying that we don’t need changes to the process, but we need a uniform change to allow businesses to make decisions.”
Regulators have stated that there is coordination across agencies however each regulator the FDIC and SEC are pursuing separate paths because they each deal with specialized jurisdictions.
“Every regulator has jurisdiction over certain areas, and we have jurisdiction over the receivership rules. The SEC has jurisdiction over the securities rules,” said Michael Krimminger, the deputy to the FDIC chairman for policy. “Just because someone comes out first with a rule and someone comes out second with a rule that deals with similar issues doesn’t mean they haven’t been harmonized or coordinated. They have been.”
Securitization has been in regulators’ cross hairs for more than a year. Last summer, accounting rules required banks to put previously unreported securitizations on balance sheet.
The accounting change effectively invalidated a long-standing FDIC policy — referred to as a “safe harbor” — of not claiming such unreported assets in a failure. But industry representatives said that without the safe harbor, investors would be scared off from securitizations.
As a result, the FDIC issued an advance notice of proposed rule making that said it would continue to grant the safe harbor to securitizations, but proposed several conditions for receiving the special status, including tranche and compensation limits, stronger disclosure modeled after the SEC’s Regulation AB and a 5% retention requirement.
Meanwhile, the SEC proposed strengthening Reg AB in April, with a 5% requirement for public issuers if they desire “shelf” registration, a process that speeds up the ability to issue securities, as well as tighter disclosure for both public issuers and certain private issuers.
But as the two agencies develop the regulations, they also face the task of implementing — jointly with four other regulators — similar provisions enacted by Dodd-Frank. The law, which was signed July 21, requires all six agencies to write rules that would require lenders to retain some risk on the loans they sell.
Krimminger said there are no gaps between the FDIC and SEC on risk retention and disclosure, and the new law similarly uses the 5% standard, meaning issuers should have a clear sense of what the standards will be when the rule making process is finished.
“There would be no daylight between the SEC Reg AB proposal, between our NPR proposal, and between Dodd-Frank right now for risk retention, since 5% is the baseline standard in Dodd-Frank,” he said. “If I were in the marketplace, I’d say, ‘Looks to me like it’s 5%.’ ”
But Naser noted discrepancies between the different regimes.
For example, while the SEC proposal exempts private issuers in certain areas, the FDIC plan would apply to all insured financial institutions issuing ABS, which includes private issuers.
Moreover, the new law, unlike the two regulatory proposals, provides for easing the retention requirement for certain safe residential mortgages and other asset classes determined by the regulators. Dodd-Frank also leaves open the possibility that an originator could share the 5% credit risk with the sponsor securitizing a loan, while the other proposals essentially say the sponsor would retain the risk.
“Much of the uncertainty in the securitization market derives from the different schemes for risk retention and disclosure, among other things, being raised by the Act, the Commission, and the FDIC,” Naser wrote in an Aug. 3 comment letter to the SEC. “We cannot emphasize enough that for the securitization market to serve its function as a robust, economically feasible source of funding, it is critical that a single set of standards be placed for all of its participants.”
Will the SEC and FDIC pass regulation that will cause further Bank failure and further job loss? Mistermoneyman is on this topic, stayed tuned for an exclusive report from a Bank CEO/ Founder of a community bank who has been victimized by their regulators.
