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.