The Federal Deposit Insurance Corp. is requiring banks to hold at least 5 percent of the securities on their books, as part of new rules the regulator adopted Monday that were required under the new financial overhaul law. Banks would be required to purchase their share of the securities beginning Jan. 1.
The idea is that banks with such exposure to risk would be more careful about properly screening borrowers. Experts say the bank's lack of investment in the risky securities contributed to the financial meltdown.
Financial industry executives have opposed the FDIC requirements. Banks don't have enough room on their balance sheets to retain 5 percent of all the loans they make, some executives have maintained.
"The FDIC is seriously harming the federal government's ability to exit the U.S. housing market and re-establish a private mortgage market," said Tom Deutsch, executive director of the American Securitization Forum, which represents the Wall Street firms that issue asset-backed securities. He was referring to the government's control of mortgage giants Fannie Mae and Freddie Mac. The FDIC's new rules "will make it extremely difficult" for banks to issue new securities, Deutsch said.
The so-called "skin-in-the-game" requirement was mandated by the financial overhaul law enacted in July. There is an exemption to the requirement. Banks won't have to meet it for mortgage securities that contain so-called "safe" loans, such as a traditional 30-year fixed-rate mortgage with a 20 percent down payment.
The securities may contain bundles of mortgage, credit card or auto loans. The securities will have to meet the FDIC's requirements to ensure that the government doesn't seize them if the bank fails. In addition to the 5 percent minimum holding for banks, there are other requirements such as what the banks must disclose to regulators about the securities and what documents borrowers must submit for the loans.(2 of 2)