|BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
|DIVISION OF BANKING
SUPERVISION AND REGULATION
May 23, 2002
Over the last several months, the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Office of Thrift Supervision have become aware of a number of instances in which a banking organization provided credit support beyond its contractual obligation to one or more of its securitizations. This type of support is commonly referred to as "implicit recourse" (and sometimes as "moral recourse"). Implicit recourse is of supervisory concern because it demonstrates that the securitizing institution is re-assuming risk associated with the securitized assets that the institution initially transferred to the marketplace.
Supervisors should be alert for instances where a banking organization provides implicit recourse to a securitization. Providing implicit recourse can pose a high degree of risk to a banking organization's financial condition and to the integrity of its regulatory and public financial reports. Heightened attention must be paid to situations in which an institution is more likely to provide implicit recourse, for example, when securitizations are nearing performance triggers that would result in an early amortization event.1 Supervisors should review securitization documents (for example, pooling and servicing agreements) to ensure that the selling institution limits any support to the securitization to the terms and conditions specified in the securitization documents. Supervisors also should review a sample of loans or receivables transferred between the seller and the trust to ensure that these transfers were conducted in accordance with the contractual terms of the securitization, particularly in cases where the overall credit quality of the securitized loans or receivables has deteriorated.
The banking agencies prepared the attached "Interagency Guidance on Implicit Recourse in Asset Securitization Activities" to assist bankers and supervisors in assessing the types of actions that may, or may not, constitute implicit recourse. The guidance also outlines possible supervisory actions a banking organization's primary regulator may take upon determining that the banking organization has provided implicit recourse. The actions may result in increased regulatory capital requirements for the selling institution, including requiring regulatory capital to be held against the entire amount of assets sold, as well as the possible deduction of residual interests from regulatory capital.
The Federal Reserve has long been concerned with the safety and soundness implications of banking organizations extending implicit recourse to their securitizations. The possible remedies outlined in the attached guidance are consistent with well-established Federal Reserve policy. This letter and the attached guidance should be distributed to state member banks, bank holding companies, and foreign banking organizations supervised by the Federal Reserve that engage in securitization activities. Questions pertaining to this letter, or on asset securitization issues in general, should be directed to Tom Boemio, Senior Supervisory Financial Analyst, (202) 452-2982 or Anna Lee Hewko, Senior Financial Analyst, (202) 530-6260.
Attachment (828 KB PDF)
SR letters | 2002