New US accounting norms may hit consumer lending

New US accounting norms may hit consumer lending

New rules by Financial Accounting Standard Board, in the form of FAS 166 and 167, will force banks to put securitised debt back on balance sheets and retain continued exposure to the risks related to transferred financial assets, by eliminating the concept of a “qualifying special-purpose entity.”

The amount of capital available for making new loans to consumers for credit cards and mortgages may be restricted as a result.

Used as a crucial funding tool for issuers in the asset-backed market, securitisation allows lenders to remove existing debt from their books, package the loans and later sell them as securities to investors. This allows the flow of credit to continue to consumers.

Through the programme, the Fed was able to bolster consumer lending and reopen the securitisation market for consumer ABS, nearly shutdown by a deep credit crisis in 2008. The programme also drove the high costs of funding dramatically lower.

However, issuance under the programme may suffer a sharp setback if banks retrench from making new consumer loans amid capital constraints created by heavier debt loads and new accounting and administration costs. The increased costs to banks are likely to filter down to the consumer in the form of higher borrowing costs, as well.

While banks may still opt to lend, some may not meet the ratings criteria under TALF, which requires top ratings from credit agencies, as they carry heftier debt loads.