* FDIC extends safe harbor protection to Sept. 30
* Protection applies to securitized assets at failed banks
* Gives FDIC time to consider reforms to protection
By Karey Wutkowski
WASHINGTON, March 11 (Reuters) - U.S. bank regulators extended a policy on Thursday that protects securitized assets in the event that a bank fails and is seized by regulators.
The Federal Deposit Insurance Corp said its board approved an extension of the protection until Sept. 30, 2010, as it tries to craft permanent rules designed to revive the securitization market, but with stronger standards.
FDIC Chairman Sheila Bair said in a statement that the extension will give the agency time to adopt final standards and the industry time to transition to new standards.
“We will continue to seek broad agreement on securitization reforms that can be implemented by all the regulatory agencies,” Bair said.
In December, the FDIC proposed a new treatment for so-called “safe harbor” protection for securitized assets.
The new standards, if approved by the FDIC board, would only protect securitized assets - such as those based on mortgages and auto loans - from failed banks under certain conditions.
Those conditions include banks voluntarily retaining an ownership interest in the loans they package into securities, known as keeping “skin in the game.”
Banks would also have to tighten underwriting standards and disclose more details about the underlying assets, which could include individual mortgages and other debt backing the bonds.
The proposal is designed to spur responsible securitizations, by offering banks extra protection for the loans.
Industry groups are concerned the proposal threatens to undermine the securitization market and choke off an important source of credit.
They have said that under the FDIC’s proposal, investors would bear the burden of the loss of the safe harbor if any of the securitization preconditions are not satisfied.
Comptroller of the Currency John Dugan, who serves on the FDIC board, has criticized the FDIC’s proposal as aiming to reform only a portion of the securitization market, potentially creating an uneven playing field.
Securitizations fueled the recent financial crisis because bad loans were packaged and then sliced and diced into securities that widely spread risk through the financial system.
The market for securitizations froze during the crisis and has only recently begun to thaw, largely due to government support. (Reporting by Karey Wutkowski, editing by Leslie Gevirtz)