An integral component of the Dodd-Frank statutory framework was a mandatory, comprehensive evaluation by federal agencies of “any regulation issued by such agency that requires the use of an assessment of the credit-worthiness of a security or money market instrument.” This “credit-worthiness” mandate was codified as Section 939A of the Dodd-Frank Act. As part of this overall initiative, the FDIC recently published important new guidance, Financial Institution Letter FIL-7-2015, intended to “help institutions implement the revised capital rules.”
The new Simplified Supervisory Formula Approach (SSFA) tool provided by the Financial Institution Letter FIL-7-2015 or FDIC is an Excel-based, formula-enabled tool applicable to “all FDIC-supervised banks and savings associations, including community institutions” and designed to “facilitate calculation of risk-based capital for securitization exposures and to help reduce potential burden.” In order to complete the SSFA process, covered institutions will need to input five risk-related variables—Kg, W variable, attachment point, detachment point, and p-value. Once all information has been inserted, the SSFA tool will automatically generate a tranche risk weight percentage and, when applied to the total exposure amount (also a variable), the applicable exposure capital charge.
All impacted financial institutions should become familiar with the SSFA tool and ensure that their securitization exposures are appropriately evaluated using the new tool. As the FDIC stated in its announcement of the new tool:
“Consistent with the new regulatory capital rules, the FDIC continues to expect community banks to have a comprehensive understanding of their securitization exposures and to meet all due diligence requirements.”