|BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
|DIVISION OF BANKING
SUPERVISION AND REGULATION
May 17, 2002
The federal banking agencies have identified inconsistencies across financial institutions in the regulatory capital treatment of accrued interest receivables (AIRs) related to credit card securitizations. The agencies have worked together and developed guidance that clarifies the appropriate risk-based capital treatment for banking organizations that securitize credit card receivables and record on-balance sheet assets commonly referred to as AIRs. The interagency guidance is attached.
As further detailed in the attached guidance, when a banking organization transfers a pool of credit card receivables to a trust, it typically also transfers to the trust the right to receive interest and fee income from those receivables. Some institutions continue to accrue interest and fee income on the investors' portion of the transferred credit card receivables on their balance sheets, reporting the right to these future cash flows as an AIR asset. Any accrued amounts the banking organization collects, however, generally must be transferred to the trust upon collection. Because the banking organization passes all cash flows related to the AIR to the trust, where they are available to satisfy more senior obligations before excess amounts are returned to the seller, the AIR constitutes a residual interest in the securitized assets. The AIR serves as a credit enhancement to protect third party investors in the securitization from credit losses and meets the definition of a "residual interest" under the banking agencies' rules on the capital treatment of recourse arrangements issued in November 2001, which are specifically referenced in footnote 3 of the attachment. Under those rules, an institution must hold "dollar-for-dollar" capital against residual interests even if that amount exceeds the full equivalent risk-based capital charge on the transferred assets.
The banking agencies expect banking organizations to reflect the aforementioned treatment in their regulatory reports by no later than December 31, 2002. Institutions that have been properly reflecting the AIR asset as a credit enhancement for risk-based capital purposes are expected to continue to do so. Notwithstanding these expectations, the banking agencies highlight in their guidance that there may be circumstances where a banking organization may have to treat the AIR asset in the way described by the guidance at an earlier date due to supervisory concerns or other factors.
This letter and the attached guidance should be distributed to state member banks, bank holding companies, and foreign banks with U.S. offices supervised by the Federal Reserve, especially those that engage in credit card securitization activities. Questions pertaining to this letter should be directed to Tom Boemio, Senior Supervisory Financial Analyst, (202) 452-2982 or Anna Lee Hewko, Senior Financial Analyst, (202) 530-6260.
Attachment (192 KB PDF)
SR letters | 2002