Financial Crime World

BANKING RULES TIGHTEN UP ON ASSET-BACKED SECURITIES AND OTHER INVESTMENTS

New Guidelines to Ensure Safety and Soundness of State Banks’ Investments

The Department of Financial Regulation has issued new guidelines aimed at ensuring the safety and soundness of state banks’ investments in asset-backed securities and other complex financial instruments.

Key Provisions

  • Aggregate investment in asset-backed securities by all issuers will not exceed 50% of a bank’s statutory capital base unless approved by the Department.
  • Banks will be required to perform due diligence suitability analyses before purchasing such securities, taking into account factors such as:
    • Credit risk
    • Market risk
    • Liquidity exposure

Restrictions on Investments

  • Investments in interest-only securities, futures, forwards, option contracts, and interest rate swaps are subject to restrictions. Some of these instruments may require prior written approval from the Department, while others can be approved for banks demonstrating technical expertise and sound investment policies.

Trust Preferred Securities

  • Authorized investments that combine characteristics of debt and equity.
  • Subject to certain conditions:
    • Limit on a bank’s investment in each corporate issuer: 15% of its statutory capital base.
    • Aggregate investments must not exceed policy limits or 100% of the bank’s statutory capital base, whichever is less.

Suitability Analyses

  • Banks will be required to perform suitability analyses before purchasing trust preferred securities, considering factors such as:
    • Credit risk
    • Market risk
    • Liquidity exposure
  • The analysis will include a review of the security’s rating, credit quality, and marketability.

Goal of the New Guidelines

“The goal of these rules is to ensure that state banks are making informed investment decisions that minimize risk and protect their customers’ deposits,” said a Department spokesperson.

Effective Date

The new guidelines take effect immediately, applying to all state banks subject to the jurisdiction of the Department.