New accounting rules on securitizations have messed up the market for bonds backed by credit-card debt.
No new credit card securities have been issued since the beginning of October. Such securities are created when card loans are packaged into bonds and sold to investors.
The new rules (FAS 166 and 167) require banks issuing the securities to account for them as if they were on their balance sheets. Previous treatment allowed off-balance sheet treatment for the securities.
On-balance sheet treatment gives federal regulators the right to claim those assets should the institution file for bankruptcy, effectively diminishing bondholders' claim to the assets.
On-balance sheet treatment also may increase banks’ capital requirements.
The Federal Deposit Insurance Corp. plans to discuss the issue at a board meeting Thursday and may make a ruling that clears up the confusion. The rule takes effect on the date companies begin their 2010 fiscal years.
From the start of the year until October, issuers had sold an average of about $3.5 billion worth of credit-card deals each month.
Under the old accounting standard, card issuers -- such as Citigroup, Bank of America, American Express, Capital One, J.P. Morgan Chase, and Discover packaged up pools of credit-card loans and sold them to investors.
Citigroup' said on Friday that the result should be an addition of about $154 billion to its assets, based on Sept. 30 figures.
If the Federal Deposit Insurance Corp does not change the rules regarding how it treats debt from these securities when a bank collapses, rating agencies may downgrade the securitized debt. The debt may not be rated triple-A securities.
The new debt could potentially be rated no higher than Citigroup's own ratings. That would likely lift the bank's borrowing costs when funding new credit card loans or other debt.
Until the accounting rule was changed, these securities didn't have to be included on the banks' balance sheets, so they weren't subject to the same accounting standards and disclosures required for on-balance-sheet items.
Critics of the old treatment argued this rule allowed companies to hide risky assets in these off-balance-sheet items. The new rule will force card issuers to bring off-the-book credit-card loans onto their balance sheets and set aside additional reserves to account for potential losses in these securities.
No new credit-card-backed bonds have emerged in the market since Bank of America issued a $300 million deal on Oct. 2.
Year-to-date issuance of securities made up of credit-card loans has fallen 41% to $32.3 billion from $55.2 billion a year ago, according to a Deutsche Bank note published Nov. 5.
The FDIC could issue guidelines Thursday on the accounting-rule change, which will include the grandfathering of existing credit-card securities so as to minimize the disruption caused to the issuance of such deals.