Documents
Resources
Learning Center
Upload
Plans & pricing Sign in
Sign Out

Rose

VIEWS: 29 PAGES: 31

  • pg 1
									Risk Management Using Asset-Backed Securities, Loan Sales,
Credit Standbys, and Credit Derivatives

CHAPTER NINE
SECURITIZATION OF LOANS

 The Pooling of a Group of Similar Loans
 and Issuing Securities Against the Pool
 Whose Return Depends on the Stream of
 Interest and Principal Payments
 Generated by the Loans
SECURITIZATION PROCESS
   Originator – Bank or Lender Who Makes the Loan
   Issuer – Special Purpose Entity That Issues the
    Securities
   Credit Rating Agency – Rates the Securities
   Security Underwriter or Investment Banker Helps
    Issue Securities
   Trustee – Makes Sure Issuer Fulfills All Their
    Obligations
   Servicer- Collects Payments on the Securitized Loans
ADVANTAGES OF SECURITIZATION

   Diversifies a Bank’s Credit Risk Exposure
   Creates Liquid Assets Out of Illiquid Assets
   Transforms These Assets into New Sources of
    Capital
   Allows the Bank to Hold a More Geographically
    Diverse Loan Portfolio
   Allows the Bank to Better Manage Interest Rate
    Risk
   Allows the Bank to Generate Fee Income
PROBLEMS WITH SECURITIZATION


 May Not Reduce a Bank’s Capital
  Requirements
 Prepayment Risk

 Not Available for All Banks

 May Increase Competition for the Best
  Quality Loans
 May Increase Competition for Deposits
PROMISED FEES AND PAYMENTS ON
SECURITIZED LOANS
   Coupon Rate Promised to Investors Who Buy
    Securities
   Default Rate on the Pooled Loans
   Fees to Compensate for Servicing Loans
   Fees Paid to Advise on Setting Up Securitization
    Process
   Fees Paid for Providing Liquidity Enhancement
   Residual Income For Security Seller, Trust or Credit
    Enhancer
TYPES OF SECURITIZED ASSETS

   Residential Mortgages
   Home Equity Loans
   Automobile Loans
   Commercial Mortgages
   Small Business Administration Loans
   Mobile Home Loans
   Credit Card Receivables
   Truck Leases
   Computer Leases
REGULATOR CONCERNS ABOUT
SECURITIZATION
   Risk of Having to Come Up with Large Amounts of
    Liquidity Quickly to Make Payments To Investors Holding
    Securities
   Risk of Agreeing to Serve as Underwriter for Securities
    that Cannot be Sold
   Risk of Acting as Credit Enhancer and Underestimating
    Need for Loan Reserves
   Risk that Unqualified Trustees Will Fail to Protect
    Investors
   Risk of Loan Servicers Being Unable to Satisfactorily
    Monitor Loan Performance and Collect Monies Owed
LOAN SALES


 Selling Loan Contracts Held by an
 Institution in Order to Raise New Cash
TYPES OF LOAN SALES
   Participation Loans
     Where an Outside Party Purchases a Loan. They
      Generally Have No Influence Over the Loan
      Terms
   Assignments
     Ownership  of the Loan is Transferred to the
      Buyer of the Loan. The Buyer Has a Direct Claim
      Against the Borrower.
   Loan Strip
     Short-Dated   Pieces of Longer Term Loans
REASONS BEHIND LOAN SALES


 Way to Rid the Bank of Low Yield Securities
 Way to Increase Liquidity of Assets
 Way to Eliminate Credit and Interest Rate
  Risk
 Way to Generate Fee Income
 Purchasing Bank can Diversify Loan Portfolio
  and Reduce Risk
SERVICING RIGHTS

 The Selling Bank Can Generate Fees for
 Agreeing to Keep Records, Collect Monies
 Owed and Help Enforce the Terms of a
 Group of Loan Contracts and Passing the
 Proceeds on to the Loan Buyers
RISKS IN LOAN SALES

 Best Quality Loans are the Easiest to Sell
  Which May Increase Volatility of Earnings for
  the Bank Which Sells the Loans
 Loan Purchased From Another Bank Can
  Turn Bad Just as Easily As One From Their
  Own Bank
 Loan Sales are Cyclical
STANDBY LETTERS OF CREDIT (SLCS)

   Financial Instrument that Guarantees
    Performance or Insures Against Default in
    Return for Payment of a Fee. It is a Contingent
    Obligation
     Performance  Guarantees – Guarantees a Project
      Will be Completed On Time
     Default Guarantees – Financial Institution Pledges
      Repayment of Defaulted Notes When Borrowers
      Cannot Pay
ADVANTAGES OF SLCS

 Letters of Credit Earn a Fee for Providing the
  Service
 They Aid a Customer Who Can Borrow More
  Cheaply When There is a Guarantee
 Such Guarantees Can be Issued at Relatively
  Low Cost
 Probability is Usually Low that an Issuer of SLC
  Will Ever Be Called On to Pay
REASONS FOR GROWTH OF SLCS

 Rapid Growth of Direct Financing Worldwide
 Risk of Economic Fluctuations has led to
  Demand for Risk-Reducing Devices
 Opportunity SLCs Offer Lenders to Use Their
  Credit Evaluation Skills to Earn Fee Income
  Without the Immediate Commitment of
  Funds
 The Relatively Low Cost of Issuing SLCs
STRUCTURE OF SLCS

Three Essential Elements:
 Commitment From Issuer
 An Account Party – For Whom the Letter
  is Issued
 A Beneficiary – Investor Concerned
  About Funds Committed to Account
  Party
SOURCES OF RISK WITH SLCS


 Default  Risk of Issuing Bank
 Beneficiary Must Meet All Conditions of
  Letter to Receive Payment
 Bankruptcy Laws Can Cause Problems
  for SLCs
 Issuer Faces Substantial Interest Rate
  and Liquidity Risks
WAYS TO REDUCE RISK EXPOSURE OF
SLCS

 Frequently Renegotiating the Terms of Any
  Loans Extended to Customers
 Diversifying SLCs Issued by Region and
  Industry
 Selling Participations in Standbys in Order to
  Share Risk
REGULATORY CONCERNS ABOUT SLCS

   Bank Examiners are Working to Keep Risk
    Exposure Under Control Leading to New
    Regulatory Rules:
     Banks Must Apply the Same Credit Standards to
      SLCs as for Loans
     Banks Must Count SLCs as Loans When
      Assessing Risk Exposure to a Single Customer
     Banks Must Post Capital Behind Most SLCs
CREDIT DERIVATIVES


 Financial Contracts Offering Protection to
 a Designated Beneficiary in Case of Loan
 Default
TYPES OF CREDIT DERIVATIVES


 Credit Swaps
 Credit Options

 Credit Default Swaps

 Credit Linked Notes

 Collateralized Debt Obligations
CREDIT SWAPS

 Two Lenders Agree to Swap a Portion of Their
  Customer’s Loan Payments
 Can Help Each Lender Further Spread Out Their
  Risk
 Variation is a Total Return Swap Where the
  Dealer Guarantees Parties a Specific Rate of
  Return
CREDIT OPTIONS


   Guards Against Losses in Value of a Credit
    Asset or Helps Offset Higher Borrowing Costs
    Due to Changes in Credit Ratings of the
    Borrower
CREDIT DEFAULT SWAPS


   Aimed at Lenders Able to Handle
    Comparatively Limited Declines in Value But
    Who Want Insurance Against Serious Losses
CREDIT LINKED NOTES



   Fuses Together a Normal Debt Instrument
    with a Credit Option Contract to Give
    Borrower Greater Payment Flexibility
COLLATERALIZED DEBT OBLIGATIONS

   Contain Pools of High-Yield Corporate Bonds,
    Stocks or Other Financial Instruments
    Contributed by Businesses Interested In
    Strengthening Their Balance Sheets and
    Raising New Funds. Notes of Varying Grades
    are Sold to Investors Seeing Income From
    Pooled Assets
RISKS OF CREDIT DERIVATIVES

 Partners  in Swap or Option Contract May
  Fail to Perform
 Smaller Volume – Markets are Thinner and
  More Volatile
 Legal Issues
 Regulatory Concerns


 Problems:   3, 5
TEST REVIEW

   Chapters 1 – 9
     Regulatory  Agencies/Prominent Regulations
     Unit/Wholesale/Branch/Virtual Banks

     BHC’s

     Efficiency – Scale/Scope

     Charters/DeNovo

     BS & Income Stmts

     Reserves, A/L composition, OREO…
TEST REVIEW
 Interest/Fee Income/Expenses
 Price with constant Earnings
 Profitability Ratios (Formulas Only on Sheet)
 Dupont Decomposition
 Credit/Liquidity Risk Measures
 A/L Mangement – Gap, Duration, Convexity
 YTM & Discount
 Yield Curves
TEST REVIEW

 Futures – Hedging Long/Short
 Swaps, Caps/Floors

 Securitization

 Credit swaps.



   Good Luck!!

								
To top