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OCC Bulletin 1999-46 | December 13, 1999

Interagency Guidance on Asset Securitization Activities: Asset Securitization


Chief Executive Officers of All National Banks, Department and Division Heads, and All Examining Personnel

The guidance attached to this bulletin continues to apply to federal savings associations.

The attached "Interagency Guidance on Asset Securitization Activities" was issued jointly by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision (the Agencies) on December 13, 1999. The provisions included in this policy statement are effective immediately.

For several years, large commercial banks have been using asset securitization as an alternative method of funding balance sheet assets, improving financial performance ratios and generating fee income. While the OCC continues to endorse the use of asset securitization as a tool to manage the bank's balance sheet and more efficiently meet customer needs, we remind bankers that such activity is only appropriate when properly managed. During recent examinations, our examiners have noted an unacceptable number of national banks with risk management systems or internal control infrastructures insufficient to support the institution's securitization activities. Particularly disturbing is the number of cases where the valuation of retained interests on the bank's balance sheet have not been in compliance with the standards prescribed in Statement of Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." In addition, several banks have inaccurately reported their risk-based capital by failing to appropriately account for recourse obligations arising from securitization activities.

The attached statement highlights particular areas of weakness, including the board and senior management oversight. The statement reiterates our expectation that critical components of an effective oversight program for asset securitization activities include: (1) independent risk management commensurate with the complexity of securitization activities, (2) comprehensive audit coverage, (3) appropriate residual interest valuation and modeling methodologies, (4) accurate and timely risk-based capital calculations, and (5) prudent internal limits to control the amount of equity capital at risk that is used to support securitization retained interests.

OCC examiners will continue to review asset securitization activities in national banks to ensure that the board of directors and senior management are complying with the risk management expectations detailed in this policy statement. In those cases where examiners identify weak risk management practices or lax internal controls, bank management will be directed to take immediate corrective action. In situations where bank management cannot provide objectively verifiable support for the valuation of the retained interest, the asset will be classified as loss and disallowed as an asset of the bank for regulatory capital purposes.

Additional guidance on OCC expectations for national banks involved in asset securitization activities can be found in the "Asset Securitization" booklet of the Comptroller's Handbook.

Questions about the interagency statement or other policy issues related to asset securitization activities may be directed to Kathy Dick, Director, Treasury and Market Risk Division at (202) 649-6360. Technical assistance can be provided by Greg Coleman or Jeffery Power at the same location.


Emory Wayne Rushton
Senior Deputy Comptroller
Bank Supervision Policy

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