FDIC reveals impact of securitisation rule change

The latest US bank results show the effect of recent changes in accounting rules, which brought $295 billion in securitised loans back on to balance sheets

US banks saw their assets grow by $248.6 billion in the first quarter of the year, after new accounting rules compelled them to bring hundreds of billions of dollars worth of securitised loans back on balance sheet.

According to data collected by the Federal Deposit Insurance Corporation (FDIC), "total assets reported by insured institutions were $248.6 billion (1.9%) higher than at the end of 2009, but this was entirely due to a $294.9 billion (69.9%) increase in credit card loans caused by the consolidation of more than $300 billion in securitised credit card receivables into reported loan balances at the end of the first quarter". Consolidation of other consumer loans produced another $28 billion increase.

The FDIC said banks had generated net capital for the first time in two years. Equity capital rose by $15 billion (1%) in the quarter, even though banks also converted $22 billion of capital into loan loss reserves – another consequence of the balance-sheet growth created by the accounting rule change.

As a result, the coverage ratio of capital reserves to non-current loans and leases increased for the first time in four years, rising from 58.3% to 64.2%. Earnings also rose to $18 billion, "low by historical standards" but a huge leap from the $914 million the quarter before.

But there were still signs that the banking industry remains fragile. The FDIC 'problem list' continued to grow – it now contains 775 banks, up from 702 at the end of 2009, with a total of $431 billion in assets, and the quarter also saw 41 bank failures, compared with 45 the quarter before. Loan quality remains poor, with charge-offs for loan losses up in almost every category except commercial and industrial lending. The Federal Reserve reported earlier this month that demand for new loans was still shrinking in the US, and the FDIC backs this up by noting there was no rise in assets other than that produced by the accounting rule change.