New US GAAP accounting rules for securitisations and other off-balance sheet structures will become effective on 1 January 2010, with the adoption of these standards expected to bring certain off-balance sheet activities back onto banks' books. According to a report in Moody's latest ResiLandscape newsletter, banks are in the process of assessing which of their structured transactions will need to be consolidated under the new rules.

Moody's says that private-label RMBS will be among those impacted and, as larger balance sheets mean higher capital requirements, banks are likely to find securitisations less attractive. "Residential mortgage transactions where the GSEs (Freddie Mac and Fannie Mae) fully guarantee principal and interest payments will remain off-balance sheet under the new rules," it confirms. "However, 'private-label' transactions without a GSE guarantee will potentially be consolidated. In most situations the decision to consolidate private label securitisations will be based on the bank holding an equity or first-loss tranche of their securitisations. As a result, some banks may try to sell this retained interest prior to the new rules becoming effective on 1 January 2010 to avoid consolidation."

Moody's takes Wells Fargo as an example. In the bank's most recent quarterly report to the SEC on 30 June 2009, it indicated that it expects approximately US$50bn of private-label residential mortgages to come on-balance sheet on 1 January 2010.

This excludes an additional US$37bn that Wells Fargo intends to sell prior to the new rules becoming effective. This amounts to 7% of its reported total assets at 30 June 2009. It has US$1.1trn of off-balance sheet GSE-guaranteed residential mortgages that would not be subject to consolidation.

The rating agency also points out that Citigroup indicated that it expects approximately US$9bn of private-label consumer mortgages to be consolidated, which is less than 1% of its reported total assets on 30 June 2009. "The new rules are likely to make securitisations less attractive to banks due to the higher capital requirement associated with larger balance sheets," says Moody's. "From a risk-based capital standpoint, the impact will be partially tempered by the elimination of residual interests in consolidation and their associated capital requirement."

It continues: "The new rules also eliminate the ability of banks to record immediate gains on securitisations that have to be kept on-balance sheet. Although the new rules are closer to the economic reality of such transactions, the loss of gain-on-sale accounting is a blow to banks that otherwise would have relied on these transactions to immediately maintain or increase their reported margins."

In order to side-step these issues, banks may attempt to sell all of their residual interests in securitisations, allowing them to achieve off-balance sheet treatment, suggests Moody's. "However, in the current market, there are limited buyers of these interests and the pricing offered could potentially make this option economically unattractive," it says. "Further, the Treasury has indicated that it might consider requiring banks to maintain a residual interest (or 'skin in the game') in new securitisations, as part of its financial reform plan to promote proper alignment of incentives in such transactions."