OCC Boosts Banks' Investment Cap on Asset-Backed Securities to 25%

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The Office of the Comptroller of the Currency has made it substantially easier for national banks to invest in asset-backed securities.

A rule issued Monday allows national banks to invest 25% of their capital and surplus in highly rated securities backed by credit card, auto, and other loans. The current limit on these asset-backed securities is 10% of a bank's capital.

"This rule recognizes that purchasing and selling various types of securities backed by loans is an important liquidity tool for banks and enhances safety and soundness," OCC Chief Counsel Julie L. Williams said.

"They are good income producers, and buying a security is a more liquid, more marketable holding for a bank."

The rule comes amid explosive growth in asset-backed securities. Issuance of the instruments hit $130 billion in the first 10 months of this year, up from $119 billion for all of 1995, according to Chase Manhattan Corp.'s securities unit.

The Comptroller's Office originally proposed setting the investment limit at 15% of a bank's capital, but industry leaders argued for the higher 25% cap.

The agency also confirmed that there is no limit on national bank investments in residential and commercial mortgage-backed securities or securities backed by small-business loans.

In the new rule, which takes effect Dec. 31, the agency agreed to drop a plan to bar banks from investing in any pool where a single borrower holds more than 5% of the loans.

Banking trade groups, lawyers, and consultants had argued that the 5% limit was meaningless because the rating agencies already consider concentration risk when grading a particular security.

"This change will allow banks to buy investment grade securities and doesn't arbitrarily limit them in a way that has nothing to do with credit quality," said A. Bradley Ives, a banking lawyer with Kennedy, Covington, Lobdell & Hickman in Charlotte, N.C.

"The rating agencies are the market watchdog, not the banking agencies. …