Tuesday, December 15, 2009

FDIC Approves Giving Banks Reprieve From Capital Requirements

Original posted on Bloomberg by Ian Katz:

The Federal Deposit Insurance Corp. gave banks including Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. a reprieve of at least six months from raising capital to support billions of dollars of securities the firms will be adding to their balance sheets.

Bank regulators including the FDIC and Federal Reserve want to permit a phase-in of capital requirements that rise starting next month under a change approved by the Financial Accounting Standards Board. The rule, passed in May, eliminates some off- balance-sheet trusts, forcing banks to put billions of dollars of assets and liabilities on their books.

“We’re still recovering from the damage these structures caused,” FDIC Chairman Sheila Bair said, explaining that the entities contributed to the financial crisis. The phase-in recognizes the “very fragile stage in our economic recovery,” she said at a board meeting Washington.

Executives from Citigroup, JPMorgan, Bank of America, Wells Fargo & Co., Capital One Financial Corp. and the American Securitization Forum met FDIC officials Dec. 2 to discuss capital requirements related to the FASB measure.

The executives proposed that “the transition period should extend beyond 2010 to a point in the economy where unemployment is lower and issuers are less capital-restrained from growing their balance sheet and providing credit,” according to a paper the ASF presented the FDIC.

Citigroup suggested three years to offset assets and liabilities brought onto balance sheets, Chief Financial Officer John Gerspach said in an Oct. 15 letter to regulators. Requiring banks to “assume the risk-based capital effects immediately, or even over one year, is an undeniably severe penalty,” he wrote.

Financing Cut

New York-based Citigroup argued that FASB’s rule would lead the bank to cut financing for securitizations that fuel credit- card lending, residential mortgages and student loans. Additional consumer loans would be cut as well, the bank said.

The capital requirements “will have a significant and negative impact on the amount of consumer-conduit funding that will be made available by U.S. banks,” JPMorgan Managing Director Adam Gilbert said in an Oct. 15 letter seeking a phase- in period.

Investors are wary of a company’s unknown obligations after the world’s biggest banks and brokerages reported more than $1.7 trillion in writedowns and credit losses since the start of 2007, some stemming from losses in off-balance-sheet entities.

Many lenders made profits before the subprime-mortgage market collapsed by selling pools of loans to off-balance-sheet trusts, which repackaged the pools into mortgage-backed securities. Some banks then sold the securities to other off- balance-sheet vehicles they sponsored, concealing from investors that the securities were backed by deteriorating mortgages.

Norwalk, Connecticut-based FASB, which writes U.S. accounting standards, is overseen by the Securities and Exchange Commission. FASB’s rules aren’t subject to approval by the banking regulators.

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