Home » NEWS » New FDIC has banks assuming more risk

New FDIC has banks assuming more risk

WASHINGTON — Banks will have to share in the risk when they sell investments of the kind that rocked the financial system in 2008 under rules adopted Monday.

The Federal Deposit Insurance Corp. is requiring banks hold at least 5 percent of the securities on their books, as part of new rules the regulator adopted today that were required under the new financial overhaul law. Banks would be required to purchase their share of the securities beginning Jan. 1.

The idea is that banks with such exposure to risk would be more careful about properly screening borrowers. Experts say the bank’s lack of investment in the risky securities contributed to the financial meltdown.

Financial industry executives have opposed the FDIC requirements. Banks don’t have enough room on their balance sheets to retain 5 percent of all the loans they make, some executives have maintained.

“The FDIC is seriously harming the federal government’s ability to exit the U.S. housing market and re-establish a private mortgage market,” said Tom Deutsch, executive director of the American Securitization Forum, which represents the Wall Street firms that issue asset-backed securities. He was referring to the government’s control of mortgage giants Fannie Mae and Freddie Mac. The FDIC’s new rules “will make it extremely difficult” for banks to issue new securities, Deutsch said.

The so-called “skin-in-the-game” requirement was mandated by the financial overhaul law enacted in July. There is an exemption to the requirement. Banks won’t have to meet it for mortgage securities that contain so-called “safe” loans, such as a traditional 30-year fixed-rate mortgage with a 20 percent down payment.

The securities may contain bundles of mortgage, credit card or auto loans. The securities will have to meet the FDIC’s requirements to ensure that the government doesn’t seize them if the bank fails. In addition to the 5 percent minimum holding for banks, there are other requirements such as what the banks must disclose to regulators about the securities and what documents borrowers must submit for the loans.

At a public meeting, the FDIC board also voted, 4-1, to extend through Dec. 31 a guarantee against seizure of the securities in a bank failure if the requirements aren’t met. It was set to expire Thursday.

Without an extension, the market for asset-backed securities would be completely “shut down,” Michael Krimminger, a deputy to FDIC Chairman Sheila Bair, told board members at the meeting.

“A fair balance has been struck between protecting the FDIC’s deposit insurance fund and allowing participants to adjust to a safer, more transparent” market for asset-backed securities, Bair said.

John Walsh, the acting comptroller of the currency, voted against the new rules. He said it would make more sense for all the federal banking regulators, including the Treasury Department agency he heads, to adopt uniform rules together.

Bair said the FDIC will work with the other regulators to develop those standards for banks. Once they are in place, the FDIC will “automatically” set its rule to conform to them, she said.


… we’d like to ask for your support. More people are reading the Mississippi Business Journal than ever before, but advertising revenues for all conventional media are falling fast. Unlike many, we do not use a pay wall, because we want to continue providing Mississippi’s most comprehensive business news each and every day. But that takes time, money and hard work. We do it because it is important to us … and equally important to you, if you value the flow of trustworthy news and information which have always kept America strong and free for more than 200 years.

If those who read our content will help fund it, we can continue to bring you the very best in news and information. Please consider joining us as a valued member, or if you prefer, make a one-time contribution.

Click for more info

About Megan Wright

Leave a Reply

Your email address will not be published. Required fields are marked *