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FDIC toughens bank rules on risk

Associated Press / September 28, 2010

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WASHINGTON — Banks will have to share in the risk when they sell investments of the kind that rocked the financial system in 2008 under rules adopted yesterday.

The Federal Deposit Insurance Corp. is requiring banks hold at least 5 percent of such securities on their books, beginning Jan. 1.

The idea is that banks would be more careful about screening borrowers. Experts say the bank’s lack of investment in risky securities contributed to the financial meltdown.

Financial industry executives have opposed the FDIC requirements.

The so-called skin-in-the-game requirement was mandated by the financial overhaul law enacted in July. There is an exemption; banks won’t have to meet it for mortgage securities that contain so-called safe loans, such as a traditional 30-year fixed-rate mortgage with a 20 percent down payment.

The securities may contain bundles of mortgage, credit card, or auto loans. The securities will have to meet the FDIC’s requirements to ensure that the government doesn’t seize them if the bank fails.