What Happens to Restructured Loans and Bank Capital

One-to-four-family mortgage loans usually have a risk-weighting of 50% for purposes of calculating a bank's capital requirements.  Once they're restructured, they receive a risk-weighting of 100%.  Banks suddenly need a lot more capital to balance these assets that have been recognized as riskier. 

What has really changed?  Well, nothing about the loans.  They carried just as high a risk of default one minute before restructuring as they do one minute after, but the impact on the amount of capital required can be quite significant!  Some of the biggest banks won't be able to do this without a capital infusion from somewhere.  Let's see, where to find more capital . . . .

Oh, I know, we'll change the rules about risk-weighting.  We'll let the restructured loans keep their previous risk-weighting, "so long as the loan continues to meet other prudential criteria."

Link to Interim Final Rule:  http://www.occ.treas.gov/ftp/bulletin/2009-22.html

(ag) July 12, 2009, in Capital, Lending Issues, Federal Banking Agencies, Economy