Magazine article American Banker

Fed Staff Eyes Funding Unit Reserve Rules; Changes Would Affect 'Orphan' Finance Companies of Banks

Magazine article American Banker

Fed Staff Eyes Funding Unit Reserve Rules; Changes Would Affect 'Orphan' Finance Companies of Banks

Article excerpt

WASHINGTON -- The Federal Reserve Board staff is considering ways to impose reserve requirements on off-balance-sheet transactions that banks use to move assets off their books, according to sources close to the agency.

The staff proposal, which could be presented to the board as early as Dec. 11, would amend Regulation D, which defines deposits and imposes uniform reserve requirements on depository institutions.

If adopted by the board, the changes would affect so-called "orphan" finance companies, which some banks have formed -- but do not legally own -- to purchase the banks' assets. These orphan companies then sell to investors commercial paper collateralized by those assets.

Experts say the changes also could reduce the economic attraction of "securitizing" assets -- when banks, for example, package automobile loans as securities that are sold to investors.

"Potentially, these changes could make it more difficult and expensive" for banks that want to do these kinds of deals, said Robert Houghton, an associate with First Boston Corp. in New York.

Gilbert T. Schwartz, a Washington attorney and former associate general counsel for the Fed, predicted that the changes could kill a number of deals already in place or on the drawing board.

Depository institutions generally are required to maintain noninterest-bearing reserves equal to a portion of their deposits. Under the Fed staff's plan, sources said, the agency would broaden the definition of a deposit to include any liability the bank holds in these types of financing arrangements, thereby forcing the institution to place more funds on reserve.

Among orphan finance subsidiaries, the most widely publicized is Chatsworth Funding Inc., which was formed two years ago to purchase Citibank loans. But a number of others are in the works, and many are seeking exemption from registration from the Securities and Exchange Commission, said Edward A. Siedle, who recently left the agency to joint the New York law firm Shereff, Friedman, Hoffman & Goodman.

Thrifts sponsoring such deals include First Federal of Michigan, Detroit; Glendale Federal Savings and Loan, Los Angeles, and carteret Savings & Loan in Morristown, N.J., according to the SEC.

In addition, Merrill Lynch & Co. …

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