Fed Board Proposes New Rules for Banks --- Asset-Backed Securities Would Reap Benefits Of Capital Guidelines
WASHINGTON -- The Federal Reserve Board proposed new capital guidelines for banks that would give a boost to the market for asset-backed securities.</br></br>The Fed yesterday also approved a rule eliminating most of the restrictions, or "firewalls," separating the activities of banks and their affiliates that underwrite and deal in securities.</br></br>The capital guidelines are designed to spell out more clearly the amount of capital banks must hold when they sell securities backed by loans but, under the recourse agreement with the buyer, retain part of the risk of loss.</br></br>Asset-backed securities are formed by pooling groups of assets, such as small-business loans, and packaging them into securities for resale in the secondary market.</br></br>The proposal would provide the biggest break to banks that sell triple-A rated asset-backed securities. Currently, banks that sell those instruments are assessed an 8% capital charge on the security's full value. Under the proposed guidelines, the 8% charge would be applied to 20% of the value of their stake in the security, for an effective 1.6% capital requirement, the Fed said.