Capital Markets Accounting Developments Advisory 2010-1
February 2010
At a glance
Regulatory impact of consolidated variable interest entities.
February 1, 2010
Regulatory impact of consolidated variable interest entities
The Office of the Comptroller of the Currency (OCC); Board of Governors of the Federal Reserve System (Board); Federal Deposit Insurance Corporation (FDIC); and the Office of Thrift Supervision (OTS) (collectively, the agencies) have finalized their capital guidelines for the impact of consolidation of asset backed entities.
Many regulated entities will consolidate securitization and similar entities as a result of the issuance of Financial Accounting Standard Board’s Statements of:
- Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (FAS 166), and
- Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167).
The general risk-based and advanced risk-based capital adequacy frameworks have been amended by adopting a final rule that:
- Eliminates the exclusion of certain consolidated asset-backed commercial paper programs from risk weighted assets;
- Provides for an optional two quarter implementation delay followed by an optional two-quarter partial implementation of the effect on risk-weighted assets that result from changes to U.S. generally accepted accounting principles;
- Provides for an optional two-quarter delay, followed by an optional two-quarter phase-in, of the regulatory limit on the inclusion of the allowance for loan and lease losses (ALLL) in tier 2 capital for the portion of the ALLL associated with assets consolidated as a result of FAS 167; and
- Provides agency authority to require a banking organization to treat entities that are not consolidated under GAAP as if they were consolidated for risk-based capital purposes based on the risks the banking organization has with the structure.
The delay and subsequent phase-in periods only apply to the agencies’ risk-based capital requirements, not the leverage ratio requirement.
The rule will be effective 60 days after publication in the Federal Register (expected to be effective March 2010). Banking organizations include banks, savings associations, and bank holding companies (BHCs). FAS 166 and FAS 167 modified the accounting treatment under U.S. GAAP for most structured finance transactions involving a special purpose entity, and are effective for most entities for calendar 2010.