FDIC expects FAS 166 and 167 to increase bank capital requirements
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Federal Deposit Insurance Corporation (FDIC) directors agreed at their August 26th Board meeting that following implementation of Statements of Financial Accounting Standards Nos. 166 and 167 in January 2010, banking organizations affected by the new accounting standards generally will be subject to higher minimum regulatory capital requirements. In order to “better align regulatory capital requirements with the actual risks of disclosures,” banking regulatory agencies have drafted a proposal [1] for comment on whether a phase-in of the increase in regulatory capital requirements is needed.
The new standards require that under certain circumstances banks will be required to account for securitized assets and other financial assets, which are currently not consolidated, on their balance sheets.
FDIC Chairman Shelia Bair applauded the action taken by the Financial Accounting Board (FASB) in adopting FAS 166 and 167 as helping to bring an end to “the financial engineering that created so much damage.” At the same time, Bair said, the financial system requires a “sustainable securitization market.”
Statement of Financial Accounting Standards No. 166, Transfers of Financial Assets, is an amendment to FASB Statement 140, and Statement of Financial Accounting Standards No. 167 is Amendments to FASB Interpretation 46 (R).
FASB provided an overview of the changes [2] provided for in these amendments in a Webcast on August 24, “Amendments to the Accounting for Securitizations and Special Purpose Entities.”
FAS 166, Transfer of Financial Assets
- Removes concept of the qualifying SPE (“QSPE”). All variable interest entities (including former QSPEs) must be evaluated for consolidation under Interpretation 46(R), as revised by SFAS 167.
- Modifies the financial components approach:
- Clarifies application of the conditions for surrender of control over transferred financial assets.
- Amends the guidance on initial measurement of a transferor’s interest in transferred financial assets
- Enhances disclosure requirements.
- Requires that the assets be isolated.
SFAS 167, Amendments to Interpretation 46(R)
- Amends certain guidance for determining whether an entity is a variable interest entity (VIE) –Changes nature of kick-out rights held by equity holders for determining whether the entity is a VIE
- Replaces quantitative approach for determining the primary beneficiary (PB) with a qualitative assessment
- Requires ongoing assessments as to whether an enterprise is the PB of a VIE