Accounting & Tax

FASB 140 Extension to Rescue Bank Balance Sheets

Banks and their lawyers better get cracking on their homework if they hope to avoid unwanted assets on their books.
Ed ZwirnJune 6, 2001

Banks hoping to keep securitized credit card balances off their balance sheets expect to get a major break from FASB, when the standards-setting body issues a ruling giving them as much as four more years to comply with a recent FASB statement.

FAS 140, which took effect March 31, deals with asset securitizations and devises tests for conditions under which the companies creating them can remove or “isolate” the assets in question from balance sheets.

Included among the three “tests” of whether an issuer can isolate securitized assets is the question of whether or not these assets can be reclaimed under certain circumstances such as bankruptcy.

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While non-bank issuers of asset-backed securities commonly use layers of ownership to insulate the underlying assets from seizure during Chapter 11 proceedings, banks themselves are subject instead to laws governing the Federal Deposit Insurance Corporation, giving the FDIC wide rights to seize bank assets and supersede Federal bankruptcy law.

“Since the FDIC has the power to take the assets back, the current structure of bank securitizations can’t meet that test,” FASB staff member Stephen Young told CFO.com.

When questions arose about what banks needed to do to comply with the new rule, FASB staff in April issued a technical bulletin with answers to frequently asked questions. It recommended that in most cases the board give banks until Dec. 31 to comply. However, in cases where banks need permission for necessary legal changes from securities-holding investors, FASB proposed a June 30, 2005 deadline.

The FASB staff bulletin also specified a comment period, which expired June 1. The board, now reviewing the comments, is expected to act by the end of the month, said Young.

Isolation Measures

In the meantime, the attorneys are already at work.

David Eisenberg of Simpson, Thacher & Bartlett, advises clients that they need to do their homework if they want to avoid carrying these often unproductive assets on their books. “If a bank is starting from scratch, it’s no big deal,” he says.

In general, banks creating asset-backed bonds in the form of credit card securitizations “sell assets to be securitized directly into a trust,” usually called a credit card master trust, Eisenberg says.

These banks, if they have these credit card-backed bonds on the books, are faced with “converting from a one-step structure into a two- step structure,” in effect adding another layer of ownership, he adds.

This may or may not necessitate the filing of a new SEC registration, or Form S-3, the attorney says.

In addition, current holders of the securities may be required to give consent.

FASB will probably give four-year extensions for the deals in which the structural changes require the consent of the holders, Eisenberg notes, adding that he nonetheless expects compliance to be completed in most cases by the end of the year.

“The additional transition period is clearly needed because it’s not possible to just snap your finger and comply,” Eisenberg says.