U.S. Regulators Propose Cracking Down on Bank Residuals
Dow Jones News (08/14/00) No. 3696 p.230; Nicholson, Jonathan

On Monday, as part of an interagency effort, the Federal Deposit Insurance Corp. (FDIC) decided to tighten capital requirements for banks that carry residuals on their balance sheets. Residuals, which are assets left over after securitization, have been blamed for two recent bank failures. Securitization is when a bank takes a pool of loans, bundles them together, and sells them to other investors. Banks can retain a small interest in securitization, usually taking the riskier part of the loan pool to enhance the sold portion's creditworthiness. This becomes a problem when banks place unrealistic value on the hard-to-trade assets. The FDIC said that regulators are concerned about "inappropriate or aggressive valuations," and "inadequate levels of capital held in relation to the risk exposure of residual interests and excessive concentrations in holdings of residual interests in relation to capital." In response, the agencies seek to install a "dollar for dollar" capital treatment of residuals.

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