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Trading and Capital-Markets Activities Manual

Capital-Markets Activities: Securitization and Secondary-Market Credit Activities  (Continued)
Source: Federal Reserve System 
(The complete Activities Manual (pdf format) can be downloaded from the Federal Reserve's web site)


A banking organization may be involved in asset securitization in many ways: originating the assets to be pooled, packaging the assets for securitization, servicing the pooled assets, acting as trustee for the pool, providing credit enhancements, underwriting or placing the ABS, or investing in the securities. Individual securitization arrangements often possess unique features, and the risks addressed in this abbreviated version of the examiner guidelines7 do not apply to all securitization arrangements. Arrangements may also entail risks not summarized here. Examiners should judge a banking organization's exposure to securitization with reference to the specific structures in which the organization is involved, and the degree to which the organization has identified exposures and implemented policies and controls to manage them. Examiners may tailor the scope of their examinations if the banking organization's involvement in securitization is immaterial relative to its size and financial strength. 

Examiners should determine if a banking organization involved in the issuance of ABS as originator, packager, servicer, credit enhancer, underwriter, or trustee has adequately analyzed the assets underlying the asset-backed security and the structure of its transactions, including- 

  the characteristics and expected performance of the underlying assets, 
  the banking organization's ability to meet its obligations under the securitization arrangement, and 
  the ability of the other participants in the arrangement to meet their obligations. 

Analysis of the underlying assets should be conducted independently by each participant in the process, giving consideration to yield, maturity, credit risk, prepayment risk, and the accessibility of collateral in cases of default. An originator should further consider the impact of securitization on the remaining asset portfolio and on the adequacy of loan-loss reserves and overall capital. 

The financial position and operational capacity should be adequate to meet obligations to other parties in a securitization arrangement, even under adverse scenarios. Accordingly, a banking organization should ensure that the pricing of services is adequate to cover costs over the term of the obligation, as well as to compensate for associated risks. Furthermore, the organization should have contingency plans to transfer responsibilities to another institution in the event that those responsibilities can no longer be fulfilled. 

 6. The Joint Agency Policy Statement on Interest-Rate Risk (see SR-96-13) advises institutions with a high level of exposure to interest-rate risk relative to capital that they will be directed to take corrective action. 
7. A complete version of the ''Examination Guidelines for Asset Securitization'' is attached to SR-90-16.


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