Pub. 6 2011-2012 Issue 3

September/October 2011 17 Extraordinary Service for Extraordinary Members. potentially thereafter) thanwould be required under the gen- eral approach. The Final Rule has leveled the playing field. Risk Retention In March of this year, federal agencies issued a set of proposed rules requiring securitization sponsors to retain an economic interest in the assets they securitize (the “Pro- posed Rule”). For many banks, their primary securitization activities arise in sales of the residential mortgages they originate. This Proposed Rule is intended to “provide a sponsor with an incentive to monitor and control the quality of the assets being securitized and help align the interests of the sponsor with those of investors” in the asset backed securities (“ABS”). The Proposed Rule requires the sponsor 6 of a securiti- zation transaction to retain 5 percent of the credit risk of the assets collateralizing an issue of ABS. Securitizations of certain residential mortgages, commercial loans, com- mercial mortgages, and auto loans that satisfy stringent underwriting criteria can qualify for exemption from the risk retention requirements (each a “QA”). 7 The contours of these exemptions have been the subject of much comment, discussion, and debate as the stringent underwriting criteria for QAs could lead to banks unduly restricting or rationing credit. Another source of debate is that the Proposed Rule would allow Fannie Mae and Freddie Mac to satisfy their risk retention obligations, for as long as they are in conser- vatorship or receivership with capital support from the U.S. government, by simply guaranteeing the timely payment of principal and interest on securitizations. Dodd-Frank places the responsibility for retaining risk on sponsors (or issuers) but authorizes federal agencies to require that lending banks (originators) share the risk reten- tion obligations. The Proposed Rule does not require lending banks to retain risk but would permit a sponsor to allocate a portion of its risk retention requirement to any lending bank that contributed at least 20 percent of the underlying assets in the pool. The impact of the risk retention requirement on banks will depend, in part, on how the risk retention require- ment is shared. 8 If banks are required to share risk (either directly by regulation or indirectly though an allocation from a sponsor), they need to hold risk-based capital against this risk exposure. Smaller banks such as small community banks could lack sufficient capital resources to share risk retention obligations or hold non-QAs that were not securitized on their balance sheets. In contrast, large banks have the financial capacity to share risk retention obligations with sponsors or hold non-QAs on their balance sheets, giving these banks an advantage over smaller banks, which could ultimately reduce competition in lending. Even if banks are not required to Q Capital Confusion? — continued on page 18 Nebraskans serving Nebraskans nebraskablue.com Blue Cross and Blue Shield of Nebraska is an Independent Licensee of the Blue Cross and Blue Shield Association.