Dec. 15 (Bloomberg) -- The Federal Deposit Insurance Corp. is proposing new rules on banks’ sales of securities backed by loans and leases, including limits on the pay of companies involved, after past practices helped create the worst financial crisis since the Great Depression.
The U.S. agency’s board voted to seek comment on possible conditions for bank securitizations at a meeting today in Washington. Banks would have to follow the guidance to win a so- called safe harbor that prevents the FDIC from seizing the assets bundled into their securitizations when it winds down failed institutions, making the bonds attractive to investors.
Policy makers are seeking to transform the almost $4 trillion U.S. market for securitizations not created by government-supported entities. Risky lending enabled by asset- backed bonds and investor losses on debt including subprime-mortgage securities led to a collapse in the world’s economies.
“We’re trying to strike a middle ground here” between those who want to eliminate securitization completely and those who want little to change, FDIC Chairman Sheila Bair said at the meeting. “I look forward to eventually finalizing strong, common-sense standards.”
The U.S. House last week passed a financial-overhaul bill that includes a requirement that loan originators and companies that package debt into securities retain 5 percent of the credit risk, among additional changes including ones related to disclosures. The Senate is considering similar modifications.
Compensation Block
The FDIC’s board agreed to issue a so-called advance notice of proposed rulemaking, in which the agency will ask for comment on 35 questions and offer a version of what the securitization conditions might look like, according to an e-mailed copy of the planned notice.
It plans that approach rather than other options that could move more quickly toward final regulations because of interference from other regulators, said Joshua Rosner, an analyst in New York at investment research firm Graham Fisher & Co., said.
“The agency’s push to create smart, rational market- and investor-friendly standards seems to be running into opposition from other regulators who have repeatedly demonstrated their inability to separate what’s good for banks and issuers with what’s good for markets,” Rosner said in a telephone interview.
In its “sample” rule, the FDIC suggests, among other things, blocking for home-loan bonds any more than 80 percent of the compensation for lenders, securitization sponsors, credit raters and bond underwriters from being paid upfront, with the rest due over five years and based on asset performance.
Risk Retention
It also proposes requiring sponsors to retain 5 percent of credit risk of all securitizations, as well as barring from securities any home loans less than a year old, or that don’t rely on documented borrower income.
Comptroller of the Currency John Dugan raised objections at the meeting to several ideas that he said might be part of rule changes. Those included: a ban on external support for issuances; the creation of the same disclosure requirements for private placements as public offerings; six-class limits for some securitizations; and the requirements for risk retention and the seasoning of mortgages ahead of securitizations.
Dugan and Office of Thrift Supervision Acting Director John Bowman, two of the five members of the FDIC’s board, said the agency may hurt banks competitiveness if it doesn’t act in tandem with other regulators such as the Securities & Exchange Commission and Federal Reserve, and may be best served waiting for lawmakers to finish deliberations.
Industry Reforms
“It would be far preferable to have rules that would apply across the board, as envisioned by the legislative proposals, than adopt a rule that applies only to insured depository institutions,” Dugan said.
The House legislation, approved 223-202, was weakened from a proposal to require as much as 10 percent risk retention, and allowed regulators to exempt commercial-mortgage bonds whose riskiest slices are bought by third parties doing due diligence.
The industry also is seeking to reform itself in some ways, with the American Securitization Forum today releasing guidelines for so-called representations and warranties on loans put into residential mortgage-backed securities. Such contract clauses can require lenders or issuers to repurchase debt that fails to match promises on its quality.
The New York-based trade group argued that the guidelines would help address the objectives of proposals that would require issuers or originators to retain slices of securitizations. The FDIC’s ideas include objectionable ones, the ASF said in a statement.
Credit Needs
“A number of the proposals presented today may inadvertently slow the restart of the securitization markets at a time when American consumers and small- and medium-sized business most need the credit availability that these critical markets provide,” Tom Deutsch, deputy executive director of the securitization group, said in an e-mailed statement.
New accounting rules sparked concern among bond buyers and rating firms that the FDIC would be able to tap the pools of debt underlying credit-card securities to protect its deposit insurance fund after banks fail. That halted sales of such bonds in October and early November after issuance totaled $10.7 billion in September, according to data compiled by Bloomberg.
The rules from the Financial Accounting Standards Board took effect for fiscal years starting after Nov. 15, and require issuers to include assets and liabilities of securitized debt on their balance sheets in many circumstances. The FDIC last month agreed to grant safe harbors for bonds sold through March, unfreezing the market for credit-card securities, with Bair saying she wanted to seize on the opportunity to improve practices before granting a further extension.
Taking Comment
Bair said today that the sample conditions that the FDIC is considering are consistent with lawmakers’ proposals, though the agency will consider suggested changes from regulators, consumer groups, lenders and others, with a particular focus on the thoughts of “the buy-side community” of debt investors.
The comment period will last for 45 days after the publication of the rulemaking notice in the Federal Register, which is expected in about two weeks, Greg Hernandez, an FDIC spokesman, said in an e-mail.
Agencies Seek Comment on Proposed Regulatory Capital Standards Related to Adoption of Statements of Financial Accounting Standards No. 166 and 167
I. Background The agencies’ regulatory capital regime for banking organizations incorporates both leverage and risk-based measures. The leverage measure uses on-balance sheet assets as the basis for setting capital requirements that are intended to limit the degree to which a banking organization can leverage its equity capital base. The risk-based measures (the general risk-based capital rules and the advanced approaches rules) establish capital requirements intended to reflect the risks associated with on-balance sheet exposures as well as off-balance sheet exposures, such as guarantees, commitments, and derivative transactions. The agencies use generally accepted accounting principles (GAAP), as established by FASB, as the initial basis for determining whether an exposure is treated as on- or off-balance sheet for regulatory capital purposes. The GAAP treatment for structured finance transactions using a special purpose entity (SPE) generally has been governed by the requirements of Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 140) and FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN 46(R)). Under FAS 140 (as currently in effect), transfers of assets to an entity that meets the definition of a qualifying special purpose entity (QSPE) are usually recognized as sales, which permits the transferor to remove the assets from its balance sheet. In addition, FIN 46(R) specifically excludes QSPEs from its scope despite the fact that many QSPEs would have otherwise been deemed variable interest entities (VIEs) subject to FIN 46(R) and possible consolidation. On June 12, 2009, FASB finalized modifications to FAS 140 and FIN 46(R) (the 2009 GAAP modifications) through Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (FAS 166), and Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167). FAS 166 and FAS 167 are effective as of the beginning of a banking organization’s first annual financial statement reporting period that begins after November 15, 2009, including interim periods therein, and for interim and annual periods thereafter. As discussed in further detail below, the 2009 GAAP modifications, among other things, remove the concept of a QSPE from GAAP and alter the consolidation analysis for VIEs, thereby subjecting many VIEs that are not consolidated under current GAAP standards to consolidation requirements. These changes will require some banking organizations to consolidate the assets, liabilities, and equity of certain VIEs onto their balance sheets for financial and regulatory reporting purposes. II. The 2009 GAAP Modifications Under FAS 167, a VIE is an entity whose equity investment at risk is insufficient to permit the entity to finance its activities without additional subordinated financial support (for example, an entity with nominal common equity) and/or whose equity investors do not have rights or obligations with respect to the entity typical of equity investors. For example, a VIE generally exists when the administrators of an entity hold a nominal common equity interest, and debt holders hold the rest of the economic interests in the entity (which frequently are issued in various degrees of subordination). Similarly, an entity is a VIE if its equity holders, as a group, lack the right to make decisions about the entity’s activities; the obligation to absorb the expected losses of the entity, or the right to receive the expected residual returns of the entity. Thus, for example, an entity whose debt holders, rather than its common equity holders, have all essential voting rights and the rights to receive all revenue generated by the entity’s assets, generally would be a VIE. Determining whether a specific company is required to consolidate a VIE under FAS 167 depends on a qualitative analysis of whether that company has a ‘‘controlling financial interest’’ in the VIE. The analysis focuses on the company’s power over and interest in the VIE, rather than on quantitative equity ownership thresholds. A company has a controlling financial interest in a VIE if it has (1) the power to direct matters that most significantly impact the activities of the VIE, including, but not limited to, activities that impact the VIE’s economic performance (for example, servicing activities); and (2) either the obligation to absorb losses of the VIE that potentially could be significant to the VIE, or the right to receive benefits from the VIE that potentially could be significant to the VIE, or both. A company’s analysis of whether it must consolidate a VIE must incorporate the above criteria and take into account the company’s interest(s) in the VIE and the characteristics of the VIE, including the involvement of other VIE interest holders. FAS 167 also requires a company to conduct ongoing assessments using the above criteria to determine whether a VIE is subject to consolidation. FAS 166 amends FAS 140 by removing the QSPE concept from GAAP, strengthening the requirements for recognizing the transfer of financial assets to a third party, and requiring companies to make additional disclosures about any continuing involvement they may have in financial assets that they transfer. As a result, a company that transferred financial assets to an SPE that previously met the definition of a QSPE must now evaluate whether it must consolidate the assets, liabilities, and equity of the SPE pursuant to FAS 167. Furthermore, under the additional disclosure requirements in FAS 166, companies must detail in their financial statements their continuing involvement—through recourse or guarantee arrangements, servicing arrangements, or other relationships—in any financial assets that they transfer to an SPE (whether or not a company is required to consolidate the SPE following the transfer). These disclosure requirements apply as long as a transferring company is involved in financial assets that it has transferred. The 2009 GAAP modifications do not provide for the grandfathering of existing financial structures. Most banking organizations that will be required to consolidate and recognize on their balance sheets many previously unconsolidated VIEs due to the 2009 GAAP modifications will consolidate as of January 1, 2010. These newly consolidated entities will therefore be included in relevant regulatory reports of banking organizations, such as the bank Reports of Condition and Income (Call Reports), the Thrift Financial Report (TFR), and the bank holding company financial statements (FR Y–9C Report). A preliminary analysis of the 2009 GAAP modifications, as well as analysis derived from the agencies’ supervisory information, indicates that the categories of off-balance sheet exposures likely to be subject to consolidation on an originating or servicing banking organization’s balance sheet include:
Certain asset-backed commercial paper (ABCP) conduits;
Revolving securitizations structured as master trusts, including credit card and home equity line of credit (HELOC) securitizations;
Certain mortgage loan securitizations not guaranteed by the U.S. government or a U.S. government-sponsored agency;
Certain term loan securitizations in which a banking organization retains a residual interest and servicing rights, including some student loan and automobile loan securitizations; and
Other SPEs, such as certain tender option bond trusts that were designed as QSPEs.
The 2009 GAAP modifications may also require banking organizations to recognize on their balance sheets certain loan participations and other exposures not related to asset securitization. In addition, banking organizations may need to establish loan loss reserves to cover incurred losses on the assets consolidated pursuant to the 2009 GAAP modifications. Each banking organization must determine which structures and exposures must be consolidated onto its balance sheet, and assess other appropriate adjustments to relevant financial reports, as a result of the 2009 GAAP modifications. Question 1: Which types of VIEs will banking organizations have to consolidate onto their balance sheets due to the 2009 GAAP modifications, which types are not expected to be subject to consolidation, and why? Which types are likely to be restructured to avoid consolidation? III. Regulatory Capital and the 2009 GAAP Modifications The agencies’ capital standards generally use GAAP treatment of an exposure as a starting point for assessing regulatory capital requirements for that exposure. For example, if certain assets of a banking organization are transferred to a VIE through a secured financing but remain on the banking organization’s balance sheet under GAAP, the VIE’s assets are risk-weighted like other consolidated assets. However, if the assets are securitized through sale to a VIE that the banking organization does not consolidate under GAAP, generally the banking organization is required to hold risk-based capital only against its contractual exposures to the VIE. The contractual exposures may take the form of on-balance sheet exposures such as asset-backed securities and residual interests, and off-balance sheet exposures such as liquidity facilities. The 2009 GAAP modifications generally would increase the amount of exposures recognized on banking organizations’ balance sheets. Accordingly, under the agencies’ current regulatory capital requirements, the 2009 GAAP modifications generally would result in higher regulatory capital requirements for those banking organizations that must consolidate VIEs. Under the agencies’ leverage capital requirements, tier 1 capital is assessed against a measure of a banking organization’s total assets, net of the ALLL and certain other exposures. Therefore, previously unconsolidated assets that now must be recognized on a banking organization’s balance sheet due to the 2009 GAAP modifications will increase the denominator of the banking organization’s leverage ratio. Although the 2009 GAAP modifications will also affect the numerator of the risk-based and leverage capital ratios, in many cases both the risk-based and leverage capital ratios of affected banking organizations will decrease following implementation of the 2009 GAAP modifications. The risk-based capital rules specify the components of regulatory capital and recognize variations of risk levels among different exposures through different risk-weight assignments. Although for many years the agencies have used financial information reported under GAAP as the starting point for banking organizations’ regulatory reporting requirements, the risk-based capital rules adjust GAAP balance sheet inputs where appropriate to capture an exposure’s risk or the ability of elements of capital to absorb loss. In their consideration of the 2009 GAAP modifications and the interaction of the modifications with the regulatory capital requirements, the agencies have determined that the qualitative analysis required under FAS 167, as well as enhanced requirements for recognizing transfers of financial assets under FAS 166, converge in many respects with the agencies’ assessment of a banking organization’s risk exposure to a structured finance transaction and other transactions affected by the 2009 GAAP modifications. In the case of some structures that banking organizations were not required to consolidate prior to the 2009 GAAP modifications, the recent turmoil in the financial markets has demonstrated the extent to which the credit risk exposure of the sponsoring banking organization to such structures (and their related assets) has in fact been greater than the agencies estimated, and more associated with non-contractual considerations than the agencies had expected. For example, recent performance data on structures involving revolving assets show that banking organizations have often provided non-contractual (implicit) support to prevent senior securities of the structure from being downgraded, thereby mitigating reputational risk and the associated alienation of investors, and preserving access to cost-effective funding. In light of this recent experience, the agencies believe that the broader accounting consolidation requirements implemented by the 2009 GAAP modifications will result in a regulatory capital treatment that more appropriately reflects the risks to which banking organizations are exposed. Additionally, the 2009 GAAP modifications require that a banking organization regularly update its consolidation analysis with respect to VIEs, and the enhanced requirements for recognition of asset transfers and ongoing disclosure requirements for financial assets with which the banking organization maintains some relationship. These requirements are consistent with the agencies’ view that the capital treatment of some previously unconsolidated VIEs does not reflect the actual risk to which the banking organization may be exposed. Question 2: Are there features and characteristics of securitization transactions or other transactions with VIEs, other SPEs, or other entities that are more or less likely to elicit banking organizations’ provision of non-contractual (implicit) support under stressed or other circumstances due to reputational risk, business model, or other reasons? Commenters should describe such features and characteristics and the methods of support that may be provided. The agencies are particularly interested in comments regarding credit card securitizations, structured investment vehicles, money market funds, hedge funds, and other entities that are likely beneficiaries of non-contractual support. The banking agencies have carefully considered the probable effect on banking organizations’ regulatory capital ratios that will result from the 2009 GAAP modifications and the possible alignments between these effects and the risk-based principles of the risk-based capital rules. The agencies have also carefully considered the potential financial impact of the 2009 GAAP modifications on banking organizations. As part of this consideration, the agencies reviewed relevant data from banking organizations’ public financial filings and regulatory reports as well as information obtained from the supervisory process, including the results of the Supervisory Capital Assessment Program (SCAP). The SCAP evaluated the capital position of the nineteen largest U.S. banking organizations, which are also the banking organizations most involved in asset securitization. As part of the SCAP, participating banking organizations’ capital adequacy was assessed using consolidation assumptions consistent with standards ultimately included in FAS 166 and FAS 167. Having considered this information, including the SCAP results, the agencies do not, at this time, find that a compelling basis exists for modifying their regulatory capital requirements to alter the effect of the 2009 GAAP modifications on banking organizations’ minimum regulatory capital requirements. Furthermore, as discussed above, the banking agencies believe that the capital treatment of many exposures that would be consolidated under the new accounting standards aligns with risk-based capital principles and results in more appropriate risk-based capital charges. The agencies also believe that it is most appropriate for the leverage ratio to continue to reflect the total on-balance sheet assets of a banking organization, in keeping with its role as a supplement to the risk-based capital measure that limits the maximum degree to which a banking organization can leverage its equity capital base. Question 3: What effect will the 2009 GAAP modifications have on banking organizations’ financial positions, lending, and activities? How will the modifications impact lending typically financed by securitization and lending in general? How may the modifications affect the financial markets? What proportion of the impact is related to regulatory capital requirements? Commenters should provide specific responses and supporting data. Question 4: As is generally the case with respect to changes in accounting rules, the 2009 GAAP modifications would immediately affect banking organizations’ capital requirements. The agencies specifically request comment on the impact of immediate application of the 2009 GAAP modifications on the regulatory capital requirements of banking organizations that were not included in the SCAP. In light of the potential impact at this point in the economic cycle of the 2009 GAAP modifications on regulatory capital requirements, the agencies solicit comment on whether there are significant costs and burdens (or benefits) associated with immediate application of the 2009 GAAP modifications to regulatory capital requirements. If there are significant costs and burdens, or other relevant considerations, should the agencies consider a phase-in of the capital requirements that would result from the 2009 GAAP modifications? Commenters should provide specific and detailed rationales and supporting evidence and data to support their positions. Additionally, if a phase-in of the impact of the GAAP modifications is appropriate, what type of phase-in should be considered? For example, would a phase-in over the course of a four-quarter period, as described below, for transactions entered into on or prior to December 31, 2009, reduce costs or burdens without reducing benefits? Under a four-quarter phase-in approach, the amount of a newly-consolidated VIE’s assets that would be subject to the phase-in would be limited to the aggregate value of the assets held by the entity as of the last day of the fiscal year prior to its implementation of the 2009 GAAP modifications. For most banking organizations, the aggregate value would be calculated as of December 31, 2009. During such a phase-in, banking organizations would be required to hold capital (for purposes of calculating both the leverage and risk-based capital ratios) incrementally against 25 percent of exposures subject to consolidation due to the 2009 GAAP modifications for each of the first three quarters of 2010, and against 100 percent of the exposures thereafter. For example, if, as a result of the 2009 GAAP modifications, a banking organization would have to consolidate $10 billion of assets associated with transactions entered into on or before December 31, 2009, it would be required to include $2.5 billion of these assets in its regulatory capital ratios the first quarter 2010, $5 billion the second, $7.5 billion the third, and the full $10 billion of assets in the fourth quarter and future reporting periods. During such a phase-in period, the amount of capital that an institution holds against all of its exposures to a single VIE as of December 31, 2009, would not be reduced as a result of this phase-in. For example, if a banking organization is effectively required to hold risk-based capital against all exposures in a VIE due to a provision of implicit recourse, that capital treatment would continue throughout 2010. For another example, if in the first quarter of the phase-in the amount of capital required for a banking organization’s credit enhancements to a securitization on December 31, 2009, exceeds the amount of capital required for 25 percent (the first quarter phase-in amount) of the newly consolidated underlying assets, the banking organization would be required to hold the greater amount of capital. Regulatory capital rules establish only a minimum capital requirement. In all cases, banking organizations should hold capital commensurate with the level and nature of the risks to which they are exposed. Supervisors will review a banking organization’s securitization and other structured finance activities on an individual transaction and business-line basis, and may require a banking organization to increase its capital if they conclude that its capital position is not commensurate with its risk. IV. Asset-Backed Commercial Paper Programs The agencies propose to eliminate existing provisions in the risk-based capital rules that permit a banking organization, if it is required to consolidate under GAAP an ABCP program that it sponsors, to exclude the consolidated ABCP program assets from risk-weighted assets and instead assess the risk-based capital requirement against any contractual exposures of the organization arising from such ABCP programs. The agencies also propose to eliminate the associated provision in the general risk-based capital rules (incorporated by reference in the advanced approaches) that excludes from tier 1 capital the minority interest in a consolidated ABCP program not included in a banking organization’s risk-weighted assets. The agencies initially implemented these provisions in the general risk-based capital rules in 2004 in response to changes in GAAP that required consolidation of certain ABCP conduits by sponsors. The provisions were driven largely by the agencies’ belief at the time that banking organizations sponsoring ABCP conduits generally faced limited risk exposures to ABCP programs, because these exposures generally were confined to the credit enhancements and liquidity facility arrangements banking organizations provide to these programs. Additionally, the agencies believed previously that operational controls and structural provisions, as well as overcollateralization or other credit enhancements provided by the companies that sell assets into ABCP programs, could further mitigate the risk to which sponsoring banking organizations were exposed. However, in light of the increased incidence of banking organizations providing non-contractual support to these programs, as well as the general credit risk concerns discussed above, the agencies have reconsidered the appropriateness of excluding consolidated ABCP program assets from risk-weighted assets and have determined that continuing the exclusion is no longer justified. Under the proposal, if a banking organization is required to consolidate an entity associated with an ABCP program under GAAP, it must hold regulatory capital against the assets of the entity. It would not be permitted to calculate its risk-based capital requirements with respect to the entity based on its contractual exposure to the entity. V. Reservation of Authority The agencies expect that there may be instances when a banking organization structures a financial transaction with an SPE to avoid consolidation under FAS 166 and FAS 167, and the resulting capital treatment is not commensurate with the actual risk relationship of the banking organization to the entity. Under this proposal, the banking organization’s primary Federal supervisor would retain the authority to require the banking organization to treat the entity as if it were consolidated onto the banking organization’s balance sheet for risk-based capital purposes. Question 5: The agencies request comment on all aspects of this proposed rule, including the proposal to remove the exclusion of consolidated ABCP program assets from risk-weighted assets under the risk-based capital rules, the proposed reservation of authority provisions, and the regulatory capital treatment that would result from the 2009 GAAP modifications absent changes to the agencies’ regulatory capital requirements. Question 6: Does this proposal raise competitive equity concerns with respect to accounting and regulatory capital treatments in other jurisdictions or with respect to international accounting standards? Although the agencies believe that GAAP, as modified, should remain the starting point for calculating regulatory capital ratios and that the capital requirements resulting from the 2009 GAAP modifications generally will result in a more appropriate reflection of credit risk, the agencies recognize that the principles underlying the 2009 GAAP modifications—power, benefits, and obligation to bear losses—and the resulting consolidation treatment, may not in all situations and respects correspond to a treatment that would result from a more pure risk focus. Question 7: Among the structures that likely will be consolidated under the 2009 GAAP modifications, for which types, if any, should the agencies consider assessing a different risk-based capital requirement than the capital treatment that will result from the implementation of the modifications? How are commenters’ views influenced by proposals for reforming the securitization markets that require securitizers to retain a percentage of the credit risk on any asset that is transferred, sold or conveyed through a securitization? Commenters should provide a detailed explanation and supporting empirical analysis of why the features and characteristics of these structure types merit an alternative treatment, how the risks of the structures should be measured, and what an appropriate alternative capital treatment would be. Responses should also discuss in detail with supporting evidence how such different capital treatment may or may not give rise to capital arbitrage opportunities. Question 8: Servicers of securitized residential mortgages who participate in the Treasury’s Making Home Affordable Program (MHAP) receive certain incentive payments in connection with loans modified under the program. If a structure must be consolidated solely due to loan modifications under MHAP, should these assets be included in the leverage and risk-based capital requirements? Commenters should specify the rationale for an alternative treatment and what an appropriate alternative capital requirement would be. Question 9: Which features and characteristics of transactions that may not be subject to consolidation after the 2009 GAAP modifications become effective should be subject to risk-based capital requirements as if consolidated in order to more appropriately reflect risk? Question 10: Will securitized loans that remain on the balance sheet be subjected to the same ALLL provisioning process, including comparable loss rates, as similar loans that are not securitized? If the answer is no, please explain. If the answer is yes, how would banking organizations reflect the benefits of risk sharing if investors in securitized, on-balance sheet loans absorb realized credit losses? Commenters should provide quantification of such benefits, and any other effects of loss sharing, wherever possible. Additionally, are there policy alternatives to address any unique challenges the pending change in accounting standards present with regard to the ALLL provisioning process including, for example, the current constraint on the amount of provisions that are includible in tier 2 capital? Commenters should provide quantification of the effects of the current limits on the includibility of provisions in tier 2 capital and the extent to which the 2009 GAAP modifications and the changes in regulatory capital requirements proposed in this NPR affect those limits. VI. Regulatory Analysis Regulatory Flexibility Act The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), generally requires that, in connection with a notice of proposed rulemaking, an agency prepare and make available for public comment an initial regulatory flexibility analysis that describes the impact of a proposed rule on small entities. Under regulations issued by the Small Business Administration, a small entity includes a commercial bank, bank holding company, or savings association with assets of $175 million or less (a small banking organization). As of June 30, 2009, there were approximately 2,533 small bank holding companies, 385 small savings associations, 749 small national banks, 432 small State member banks, and 3,040 small State nonmember banks. As a general matter, the Board’s general risk-based capital rules apply only to a bank holding company that has consolidated assets of $500 million or more. Therefore, the proposed changes to the Board’s capital adequacy guidelines for bank holding companies will not affect small bank holding companies. Other than the proposed modifications to the risk-based capital rules that would no longer allow banking organizations to exclude consolidated ABCP programs from risk-weighted assets, the proposed rule does not impose any additional obligations, restrictions, burdens, or reporting, recordkeeping or compliance requirements on banks or savings associations, including small banking organizations, nor does it duplicate, overlap or conflict with other Federal rules. The agencies expect that the proposed modifications to the general risk-based capital rules would not materially affect small banking organizations because they do not sponsor ABCP programs. Paperwork Reduction Act In accordance with the requirements of the Paperwork Reduction Act of 1995(44 U.S.C. 3506), the agencies have reviewed the proposed rule. The Board reviewed the proposed rule under the authority delegated to the Board by the Office of Management and Budget. The agencies note that instructions related to ABCP conduits in schedule RC–R of the Consolidated Reports of Condition and Income (OMB Nos. 7100–0036, 1557–0081, and 3064–0052; FFIEC 031 and 041) and schedule HC–R of the Consolidated Financial Statements for Bank Holding Companies (OMB No. 7100–0128; FR Y–9C) would need to be revised under the proposal. The agencies, however, do not believe that there would be any additional burden associated with these instructional changes as they would be in accordance with GAAP. OCC/OTS Executive Order 12866 Executive Order 12866 requires Federal agencies to prepare a regulatory impact analysis for agency actions that are found to be ‘‘significant regulatory actions.’’ Significant regulatory actions include, among other things, rulemakings that ‘‘have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or Tribal governments or communities.’’ The OCC and the OTS each determined that its portion of the proposed rule is not a significant regulatory action under Executive Order 12866. OCC/OTS Unfunded Mandates Reform Act of 1995 Determination The Unfunded Mandates Reform Act of 1995 29 (UMRA) requires that an agency prepare a budgetary impact statement before promulgating a rule that includes a Federal mandate that may result in the expenditure by State, local, and Tribal governments, in the aggregate, or by the private sector of $100 million or more (adjusted annually for inflation) in any one year. If a budgetary impact statement is required, section 205 of the UMRA also requires an agency to identify and consider a reasonable number of regulatory alternatives before promulgating a rule. The OCC and the OTS each have determined that its proposed rule will not result in expenditures by State, local, and Tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year. Accordingly, neither the OCC nor the OTS has prepared a budgetary impact statement or specifically addressed the regulatory alternatives considered. Solicitation of Comments on Use of Plain Language Section 722 of the GLBA required the agencies to use plain language in all proposed and final rules published after January 1, 2000. The agencies invite comment on how to make this proposed rule easier to understand. For example:
Have the agencies organized the material to suit your needs? If not, how could they present the rule more clearly?
Are the requirements in the rule clearly stated? If not, how could the rule be more clearly stated?
Do the regulations contain technical language or jargon that is not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections, use of headings, paragraphing) make the regulation easier to understand? If so, what changes would achieve that?
Is this section format adequate? If not, which of the sections should be changed and how?
What other changes can the agencies incorporate to make the regulation easier to understand?