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Bank Regulation Rule Update: Investment Restrictions

The Department of Banking has issued a new rule governing the investment activities of banks in Georgia. The rule aims to ensure that banks maintain safe and sound financial practices by imposing restrictions on certain types of investments.

Asset-Backed Securities

According to the rule, aggregate investment in asset-backed securities shall not exceed 50% of a bank’s statutory capital base unless approved by the Department. Before purchasing any asset-backed securities, banks must perform a due diligence suitability analysis to determine whether the investments are suitable for purchase relative to their:

  • Asset liability position
  • Sensitivity to market risk
  • Liquidity exposure

Interest-Only Securities

The rule prohibits the purchase of stripped or detached interest-only obligations, except for securities issued under the U.S. Treasury’s Separate Trading of Registered Interest and Principal (STRIP) program. Banks may receive prior written approval from the Department to purchase other IO securities if they demonstrate:

  • Technical expertise
  • Policies sufficient to promote safe and sound use of such investments

Futures, Forwards, Option Contracts, and Interest Rate Swaps

Banks may invest in derivative instruments, including forwards and interest rate swaps, without Department approval for the purpose of managing interest rate risk. Such investments must be:

  • Denominated in U.S. dollars
  • Have a maturity not exceeding one year
  • Meet certain credit rating requirements

Trust Preferred Securities

The rule allows banks to invest in trust preferred securities, which are authorized investments subject to certain terms and conditions. Banks’ investments in each corporate issuer of trust preferred securities shall not exceed:

  • 15% of their statutory capital base
  • Aggregate investment shall not exceed policy limits or 100% of statutory capital base

Credit Quality and Suitability Analysis

All trust preferred securities must meet a suitability analysis test, which includes a due diligence review to determine whether the investments are suitable for purchase relative to banks’ tolerance for:

  • Credit risk
  • Asset liability position
  • Sensitivity to market risk
  • Liquidity exposure

Credit quality is defined as an investment rating in one of the four highest categories assigned by a nationally recognized rating service.

The new rule aims to ensure that banks in Georgia maintain safe and sound financial practices while allowing them to invest in certain types of securities that can help generate returns for their customers.