Magazine article American Banker

FSLIC Will Not Stop Liquidation of Repo Collateral

Magazine article American Banker

FSLIC Will Not Stop Liquidation of Repo Collateral

Article excerpt

WASHINGTON -- The Federal Savings and Loan Insurance Corp. said it will not interfere with the liquidation of collateral held under repurchase agreements with bankrupt thrift institutions.

Last summer, Congress amended the Bankruptcy Code to make clear that holders of repo collateral can liquidate it if the other party to the repo is undergoing bankruptcy proceedings. Banks and thrifts, however, are not subject to the bankruptcy law; when thrifts fail, the FSLIC appoints receivers. The recent FSLIC resolution is aimed at reassuring repo dealers that the ability of thrifts to enter into repos will not be impaired.

Repos are short-term loans that use securities, such as Treasury debt or mortgage-backed issues, as collateral. The borrower sells the securities to the lender and promises to repurchase them at a set time. The lender, who is said to have done a "reverse repurchase agreement," is paid interest at an agreed-upon rate. If the borrower is unable to pay interest and principal on schedule, the lender can liquidate the collateral.

The FSLIC said it will not seek to limit liquidation of collateral where the repo was entered into in a "commercially reasonable manner in the absence of fraud or other similarly extraordinary circumstances." However, it also said that the receiver could still prevent liquidation of repo collateral when the FSLIC or a federally insured institution would take over the thrift.

The much-publicized problems experienced by Continental Illinois National Bank and Trust Co. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.