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MBA urges agencies to modify risk-based capital guidelines.

The Mortgage Bankers Association sent a letter to feder-I al regulators on Feb. 3, urging them to modify the methodology behind a proposal to modify market-risk, risk-based capital (RBC) guidelines intended to provide alternatives to credit ratings for debt and securitization proposals.

MBA said the agencies' proposed simplified supervisory formula approach would have an impact, both intended and unintended. It warned the simplified supervisory formula approach (SSFA) could create opportunities for regulatory arbitrage and U.S. banks and non-U.S. banks because of different SSFA and international (Basel III) credit ratings-based market risk RBC methodologies.

"This could hinder the return of private capital to the securitization market," wrote MBA President and Chief Executive Officer David Stevens.

The Board of Governors of the Federal Reserve; the Office of the Comptroller of the Currency (OCC); and the Federal Deposit Insurance Corporation (FDIC) proposed the rule, prompted by section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which required all federal agencies to remove references to and requirements of reliance on credit ratings from their regulations and replace them with appropriate alternatives for evaluating creditworthiness.

Under the proposal, the agencies' primary approach for market-risk RBC is the simplified supervisory formula approach to assign specific risk-weighting factors to securitization positions, including re-securitization positions. The SSFA proposal applies relatively higher capital requirements to more risky junior tranches of a securitization that are the first to absorb losses and relatively lower requirements to the most senior positions. If a bank cannot--or chooses not to--use the SSFA, a securitization position would be subject to a 100 percent of asset value risk-based capital charge, which roughly corresponds to a 1,250 percent risk weight.

"MBA is concerned that banks that are not able to implement the SSFA would be put into a market-risk RBC category that is currently associated with the highest-risk securities (B, CCC)," the letter said. Consequently, for these banks, the SSFA would result in a dramatic market-risk RBC increase. This penalty could be applied for inadvertent reasons and would not reflect the underlying risk of the securitization holdings.''

MBA encouraged the agencies to review the required SSFA data inputs to ensure banks of all sizes have the abil ity to implement the SSFA without undue financial burden. "Banks that are unable to implement the SSFA would likely find the 100 percent capital charge to be an impediment for acquiring and holding securilized assets," the letter said.

Stevens warned that MBA member feedback indicates that the SSFA could potentially have a "stifling effect" on bank purchases of securitizations from the secondary market.

"Ratings have and will continue to be a major element in the pricing and trading of sccuritized assets for banks and non-bank financial institutions," the letter said. "However, for banks, the SSFA adds an additional component to this purchase decision separate from the relative risks and rewards of the investment opportunity. Since the data required to calculate the SSFA may not be immediately available, banks may be reluctant to purchase securitizations with short deadline purchase offers. Non-bank financial institutions that are not subject to the SSFA rules would not factor the SSFA in their purchase decisions. We are con cerned that the SSFA may provide a structural disadvantage for bank purchases of secondary market securitizations, which could distort the allocation of bank capital."

Additionally, the letter expressed concern that the SSFA has the potential to go beyond the intent of section 939A of the Dodd-Frank Act of not simply replacing credit ratings with an alternative market-risk RBC formulation, but also substantially increasing the market-risk RBC held banks.

MBA also noted the removal of references to ratings for market-risk RBC is a departure from Basel III, the international regulatory framework for bank capital adequacy, stress-testing and market liquidity that maintains references to credit ratings for RBC. Basel III requires a nation's bank regulators to ensure that rating agencies are operating under the criteria set forth in Basel III.

"We join the agencies in their concern that the proposal could create the opportunity for regulatory arbitrage," MBA's letter said. "Should the SSFA increase market risk RBC for U.S. banks relative to their non-U.S. peers that are regulated under the Basel III RBC guidelines, we see the strong potential for regulatory arbitrage by Basel III-compliant non-U.S. banks. This could result in reduced capital allocations for U.S. operations of foreign banks or the movement of U.S. bank securitization assets for regulatory RBC purposes."

MBA said should the net impact of the proposal increase the risk-weighting of existing assets held in the balance sheet of U.S. banks, the resulting decrease in RBC ratios could prompt many banks to decrease balance-sheet size, resulting in the net decrease in supply of credit to U.S. businesses and households.

"This could prolong the recovery from the current economic crisis," MBA said. "Further, some of the hardest hit markets that are still recovering from the economic crisis are real estate and real estate finance. The proposal could be especially harmful to these markets that would be greatly assisted by the return of private capital, including through securitization executions."

MBA urged the agencies to request further public comment and engage in ongoing dialogue with stakeholders in carefully crafting the RBC regime consistent with the DoddTrank Act.
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Title Annotation:Commercial; Mortgage Bankers Association
Comment:MBA urges agencies to modify risk-based capital guidelines.(Commercial)(Mortgage Bankers Association)
Publication:Mortgage Banking
Geographic Code:1USA
Date:Mar 1, 2012
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