Banking organizations have long been involved with asset-backed securities (ABS), both as investors in such securities and as major participants in the securitization process. In recent years they have stepped up their involvement by increasing their participation in the long-established market for securities backed by residential mortgage loans and by expanding their securitizing activities to other types of assets, including credit card receivables, automobile loans, boat loans, commercial real estate loans, student loans, nonperforming loans, and lease receivables.
It is appropriate for banking organizations to engage in securitization activities and to invest in ABS, if they do so in a prudent manner. Nonetheless, these activities can significantly affect their overall risk exposure. It is, thus, of great importance, particularly given the growth and expansion of such activities, for examiners to be fully informed on the fundamentals of the securitization process, on the various risks that securitization and investing in ABS can create for banking organizations, and on procedures that should be followed in examining banks and inspecting bank holding companies in order to effectively assess their exposure to risk and management of that exposure.
In order to provide examiners with the information and guidance they need on asset securitization, a task force of System supervisory staff from the Reserve Banks and the Board was established. The Task Force developed materials on the mechanics of securitization and related accounting issues, as well as a set of examination guidelines. These draft materials were distributed to you last September. This letter transmits the final version of the examination guidelines and educational background material for asset securitization. Attached are 1) the Examination Guidelines, 2) An Introduction to Asset Securitization – Volume 1, and 3) Accounting Issues Relating to Asset Securitization – Volume 2.
Reserve Banks are instructed to implement the examination guidelines and procedures as of July 1, 1990.
Should you have any questions, contact Roger Cole (202-452-2618), Gerald Edwards (202-452-2741), or Thomas Boemio (202-452-2982).