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Financial Institution Letter

Guidance on Asset Securitization

TO: CHIEF EXECUTIVE OFFICER 
SUBJECT: Interagency Guidelines on Asset Securitization 

The Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision have jointly issued the attached Interagency Guidelines on Asset Securitization. These guidelines highlight the risks associated with asset securitization and emphasize the concerns with certain retained interests generated from the securitization and sale of assets. The guidance addresses the fundamental risk management practices that should be in place at institutions that engage in securitization activity.

Asset securitization activities can pose significant risks to insured depository institutions and the deposit insurance funds. Recent examinations have disclosed significant weaknesses in the risk management processes at certain institutions. These weaknesses include inaccurate and insufficiently supported retained interest valuations, incorrect regulatory reporting, failure to hold sufficient capital against recourse obligations, and inadequate audit or independent review procedures.

The guidelines address the fundamental elements of an appropriate and effective risk management program for securitization activities. In particular, the guidance sets forth the supervisory expectation that the value of retained interests in securitizations must be supported by objectively verifiable documentation of the assets' fair market value, utilizing reasonable, conservative valuation assumptions. Retained interests that do not meet such standards or that fail to meet the supervisory standards set forth in the guidance will be classified as loss and disallowed as assets of the bank for regulatory capital purposes. The guidance also stresses the need for bank management to implement policies and procedures that include limits on the amount of retained interests that may be carried as a percentage of capital.

Institutions that lack effective risk management programs or engage in practices that present safety and soundness concerns may be subject to more frequent supervisory review, limitations on retained interest holdings, more stringent capital requirements, or other supervisory response.

Given the risks presented by securitization activities and, in particular, the potential volatility of retained interests, the bank regulatory agencies are actively considering the establishment of regulatory restrictions that would limit or eliminate the amount of certain retained interests that may be recognized in determining the adequacy of regulatory capital.

For more information, please contact your Division of Supervision Regional Office.

James L. Sexton

Director
 

Attachment: Interagency Guidance on Asset Securitization Activities 
PDF Format (40 Kb - PDF help or hard copy

Distribution: FDIC-Supervised Banks (Commercial and Savings) 

NOTE: Paper copies of FDIC financial institutions letters may be obtained through the FDIC's Public Information Center, 801 17th Street, NW, Room100, Washington, DC 20434 (800-276-6003 or (703) 562-2200). 

FIL-109-99

Last Updated: December 13, 1999