November 2, 2007 / 9:10 PM / 12 years ago

Federal Reserve says super SIV requires less capital

WASHINGTON (Reuters) - Banks that back a proposed new multi-billion dollar investment fund that may purchase risky mortgage-related assets will need only one tenth of the capital they would need if they were to take the assets onto their own balance sheets, the Federal Reserve has said.

Under Federal Reserve rules on capital requirements for banks, off balance sheet commitments require less capital.

Encouraged by the U.S. Treasury Department, Citigroup (C.N), JP Morgan (JPM.N) and Bank of America (BAC.N) have proposed setting up a special investment vehicle to either guarantee or buy U.S. mortgage-related assets in order to help dissipate some of the credit concerns that caused this summer’s global liquidity crisis

Promises to lend against assets transferred from a bank to the new fund, known as the Master Liquidity Enhancement Conduit, would qualify as a commitment needing less capital, the Fed said in a letter last week to Citigroup.

“The credit conversion factor that would apply to the notional amount of the M-LEC liquidity facility would be 10 percent,” wrote Norah Barger, the associate director of the Fed’s Division of Banking Supervision and Regulation.

“The effect of the letter is that assets placed in the super-SIV (technically termed M-LEC, or Master Liquidity Enhancement Conduit) would have a capital treatment that is 10 times more favorable than if the same assets were placed on the bank’s balance sheet,” Mike Mayo, an analyst with Deutsche Bank said in a note to clients.

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