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Take student loans as collateral, firms tell Fed
April 7, 2008 / 9:19 PM / 9 years ago

Take student loans as collateral, firms tell Fed

WASHINGTON, April 7 (Reuters) - The financial services industry has urged the Federal Reserve to accept as collateral triple-A rated student loan asset-backed securities as collateral for firms seeking to borrow from new Fed facilities aimed at thawing frozen credit markets.

The American Securitization Forum and the Securities Industry and Financial Markets Association wrote Fed Chairman Ben Bernanke and New York Fed President Timothy Geithner on April 2, saying those securities are safe and should be among those financial firms can pledge to borrow from the central bank.

“Given the very limited credit risk inherent in triple-A rated government guaranteed and private (student loan asset-backed securities), we believe this proposal appropriately balances managing federal government risk exposure and meeting with urgent need for additional sources of liquidity to help fund student loan originations,” the industry groups’ senior officials wrote.

As risk-wary investors have pulled back from lending in the wake of the subprime mortgage debacle, the Fed has recently launched several new facilities to provide banks and other financial firms assured sources of funding.

The central bank says that it considers accepting as collateral assets that meet regulatory standards for sound asset quality. The central bank’s list of acceptable collateral includes triple-A asset-backed securities, but does not specify securities backed by student loans.

The industry groups said lenders who make student loans depend on debt capital markets to fund those loans. Access to credit for students is likely to dry up because making those loans has now become “uneconomical,” the groups said.

Turmoil in financial markets has closed or raised the costs of access to financing markets that student lenders rely on for funding, the groups added.

Also, disruption in the auction rate securities market has closed an important source of financing for student lenders, the groups said.

Lawmakers have introduced legislation in Congress aimed at ensuring loans will be available to college students this summer before the start of the academic year. (Reporting by Mark Felsenthal; editing by Gary Crosse)

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