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Washington DC Asset Protection News
Agencies Issue Rulemakings to Amend Risk-Based Capital Treatment of Exposures to Asset-Backed Commercial Paper Programs and Securitizations with Early Amortization Provisions
The federal bank and thrift regulatory agencies today requested public comment on an interim final rule and a notice of proposed rulemaking (NPR) to amend their risk-based capital standards for the treatment of assets in asset-backed commercial paper (ABCP) programs consolidated under the recently issued Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). The NPR would also modify the risk-based capital treatment of certain securitizations with early amortization provisions.
An ABCP program is usually carried out through a bankruptcy-remote special purpose entity generally sponsored and administered by a banking organization (banks, bank holding companies, and thrifts) to provide funding to its corporate customers by purchasing asset pools from, or extending loans to, those customers. The ABCP provides funding for these assets through the issuance of commercial paper into the market. These issuances may be credit enhanced by various means, usually by a sponsoring bank.
Under the interim rule, sponsoring banking organizations may remove consolidated ABCP program assets from their risk-weighted asset base for purposes of calculating their risk-based capital ratios. However, sponsoring banking organizations must continue to include any other exposures they have to these programs, such as credit enhancements, in risk-weighted assets. The interim rule also amends the risk-based capital standards to exclude from tier 1 and total capital any minority interests in ABCP programs consolidated by sponsoring banking organizations under FIN 46. The interim rule will be in effect only for the regulatory reporting periods ending September 30 and December 31, 2003, and March 31, 2004.
The risk-based capital treatment set forth in the interim rule does not alter the accounting rules for balance sheet consolidation as set forth under generally accepted accounting principles. Consequently, banking organizations will be required to report consolidated ABCP program assets in their tier 1 leverage ratio calculation.
The NPR solicits comments on a permanent, risk sensitive risk-based capital treatment for the risks arising from ABCP programs. In particular, it proposes to permanently permit banking organizations to exclude from their risk-weighted asset base those assets in ABCP programs consolidated onto sponsoring banking organizations' balance sheets as a result of FIN 46. In addition, the NPR also would require banking organizations to hold risk-based capital against liquidity facilities provided to ABCP programs with an original maturity of one year or less. This treatment recognizes that such facilities, which currently are not assessed a capital requirement, expose banking organizations to credit risk.
The agencies are also proposing a risk-based capital charge for certain types of securitizations of revolving retail credit facilities (for example, credit card receivables) that incorporate early amortization provisions. The goal of these capital proposals is to more closely align the risk-based capital requirements with the associated risk of the exposures.
The interim final rule and NPR are being issued by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
LLC envelope offers substantial advantages over other entities
LLC envelope offers substantial advantages over other entities, there are at least five common circumstances when a tax regime other than an S corporation may be more appropriate: 1) the business cannot qualify as an S corporation; 2) the one-class-of-stock limitation for S corporations cannot accommodate certain business terms agreed to by the parties; 3) the business involves appreciating assets (i.e., assets that have, or are likely to have, a fair market value in excess of basis), such as real estate; 4) the business has considerable debt and the owners anticipate significant losses; and 5) the wage-reduction tax strategy explained previously will not benefit the owners because either the primary income of the business is excluded from self-employment tax or, in the case of newly formed companies, one or more employee-owners already receive aggregate wages or self-employment income from an existing business in an amount which approaches the taxable wage base limitation
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Definition:
Holding several investments that have different risks. The concept of "Don't put all your eggs in one basket." The chance that a single stock or other investment will lose money is offset by the chances of your other stocks and investments making money.
Totten trust
Definition:
A savings account that allows the depositor to open the account as trustee for someone else (no real trust is set up). Account owners may use the funds as they see fit during their lifetime, and then upon their death the account balance is paid to the named beneficiary.
Bonds
Definition:
Essentially loans or debt. When someone lends you money, he or she gets an IOU that promises the loan will be repaid with interest. When you buy a bond, you're basically buying that IOU. A bond certificate is like an IOU: it shows the amount loaned (principal), the rate of interest to be paid on the loan and the date that the principal will be paid back (maturity date). Bonds can be issued by government agencies, such as the U.S. Treasury and by corporations to raise money.
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