Recourse and Residual Capital Rules
The bank regulators have completed action on a long-pending rule to revise the capital standards applicable to credit risk structures in which a bank takes on recourse, uses a direct credit substitute or holds a residual interest. Consistent with the concern related to residuals in the wake of recent bank failures, the new rule requires dollar-for-dollar capitalization of most residual interests. However, the final rule does not take action on managed assets, a controversial issue raised in the earlier proposal that could have imposed significant costs on credit-card issuers. The rule includes a new ratings-based approach to assessing capital on asset-backed securities (ABS).