Proposed Changes to Accounting Rules May Signal Demise of Asset-Backed Securitization Market and Tighter Consumer Credit
New research from TowerGroup finds that two proposed accounting amendments, coupled with severe downward pressure from the ongoing credit crisis, would significantly alter the ways banks and other lenders account for off-balance-sheet assets. The changes could affect trillions of dollars in consumer loans and potentially cut off sources of consumer borrowing at a time of shrinking liquidity.
Proposed rules from the Financial Accounting Standards Board (FASB) governing asset securitizations FAS 140 and FIN 46(R) could have a significant and negative impact on credit markets – an impact that could potentially cost banks over $60 billion (USD) in annual earnings, according to TowerGroup research.
Securitization of assets is an essential capital funding source for banks. In fact, the Federal Deposit Insurance Corporation (FDIC) has reported that US credit card issuers rely on asset-backed securities (ABS) financing to provide more than 50 percent of their capital needs. The proposed changes, if implemented, could severely curtail the practice of packaging assets as securities and selling them as securities, freeing up capital and smoothing further investment.
If the proposed amendments go into effect, these securities could be placed back onto lenders’ books and thus require significant increases in loan loss reserves – in turn requiring billions in capital. While the proposed FASB amendments are intended to restore investor confidence in the mortgage market, TowerGroup believes the rules will have an unintended consequence of negatively impacting credit card profitability. This will, in turn, adversely impact consumers in two ways: reducing the amount of available credit; and increasing the cost of credit to consumers. TowerGroup expects the reduction in the availability of credit will have a material and negative impact on the US economy, already teetering on the edge of recession.
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