FDIC TO ISSUE RULE LOWERING CAPITAL REQUIREMENT ON SMALL BUSINESS LOANS SOLD WITH RECOURSE
FOR IMMEDIATE RELEASE
The FDIC Board of Directors has approved an interim rule to reduce
the minimum capital levels FDIC-supervised institutions must maintain
for certain small business loans and leases that are sold with
recourse. This action implements Section 208 of the Riegle Community
Development and Regulatory Improvement Act of 1994, and will become
effective when it appears in the Federal Register.
The other federal banking and thrift regulators are issuing
similar rules that will apply to the institutions they supervise.
Regulatory reporting instructions for an FDIC-supervised bank
generally require an institution that transfers assets with recourse to
continue to report these assets on its balance sheet when filing its
quarterly Call Reports. Thus, these amounts normally are included in
the denominator when calculating the bank's risk-based and leverage
capital ratios. This regulatory reporting and capital treatment
differs from how transfers of assets with recourse are reported under
generally accepted accounting principles (GAAP), which permit many such
transactions to be reported as sales, thereby allowing the assets to be
removed from the balance sheet.
In general, banks currently must maintain risk-based capital
against the full amount of assets transferred with recourse. Under the
interim rule, however, qualifying institutions that sell small business
obligations with recourse are required to maintain risk-based capital
only against the amount of recourse retained, if two conditions are
met. First, the transaction must be treated as a sale under GAAP.
Second, the transferring institution must establish a non-capital
reserve sufficient to meet the reasonably estimated liability under the
recourse arrangements. A qualifying institution is defined as one that
is well capitalized or, with the approval of the FDIC, adequately
capitalized, as these terms are set forth in the FDIC's prompt
corrective action rules. Under the interim rule, the amount of
recourse retained by a qualifying institution on transactions receiving
this preferential capital treatment cannot exceed 15 percent of the
bank's total risk-based capital.
Consistent with Section 208 of the Riegle Act, the preferential
capital treatment set forth in this interim rule will not affect the
application of prompt corrective action sanctions.
Although the rule is effective upon publication in the Federal
Register, comments will be accepted for 60 days.