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1
SecuritizationA useful tool for the Bank of the 21st
Century
Presentation to the Association of Serbian BanksBelgrade, December 6, 2007
2
Agenda
Why Securitization?
What are the challenges?
The US Sub prime Crisis
What is the future?
3
Why Securitization?
„In our country, banks are not interested in securitization because they have enough liquidity and
equity.“Senior Manager of a large CEE bank
„In our country, banks are not interested in securitization because they have enough liquidity and
equity.“Senior Manager of a large CEE bank
But why do the world‘s largest banks apply the securitization? They also have enough liquidity and
equity.
But why do the world‘s largest banks apply the securitization? They also have enough liquidity and
equity.
Because securitization can significantly improve the profitability of any bank and provides another source of
liquidity!
Because securitization can significantly improve the profitability of any bank and provides another source of
liquidity!
4
1. Why Securitization
5
FundingFunding Risk Transfer/Equity Relief
Risk Transfer/Equity Relief
The Fundamental Business Motivation
6
Synthetic
• Only „guarantee“
• Risk transfer but no funding
• Less local structuring required
• Multi-seller transactions easier to implement
• Sovereign rating ceiling of less relevance
Synthetic
• Only „guarantee“
• Risk transfer but no funding
• Less local structuring required
• Multi-seller transactions easier to implement
• Sovereign rating ceiling of less relevance
True Sale
• Sale of loan portfolio
• Funding plus risk transfer
• Legally more complex to implement
True Sale
• Sale of loan portfolio
• Funding plus risk transfer
• Legally more complex to implement
The Basic Options
7
ONSHORE
Loan PortfolioLoan Portfolio
OFFSHORE
Loan
In
sta
lmen
tsLoan
In
sta
lmen
ts
BankOriginator
Non-recourse sale
of portfolio
Non-recourse sale
of portfolio
Senior NotesSenior Notes
Public / PrivateInvestor markets
Public / PrivateInvestor markets
Mezzanine NotesMezzanine Notes
Junior NotesJunior Notes
Special
Purpose
Vehicle
( SPV)
Purchase Price
Typical True Sale Structure
Junior NoteInvestor
(e.g. Originator)
Junior NoteInvestor
(e.g. Originator)
8
ONSHORE
Loan PortfolioLoan Portfolio
OFFSHORE
Loan
In
sta
lmen
tsLoan
In
sta
lmen
ts
BankOriginator
Public / PrivateInvestor markets
Public / PrivateInvestor markets
SpecialPurpose Vehicle( SPV)
orhighly ratedInstitution(e.g. KfW)
Guarantee/CDS
Typical Synthetic Structure
Junior Investor
(e.g. Originator)
Junior Investor
(e.g. Originator)
Bank-to-backSuper Senior Hedge
Bank-to-backJunior Hedge
Bank-to-backSenior/Mezz HedgeP
oss. In
ter-
med
iate
d b
y S
PV
9
Risk Transfer / Equity Relief
• Freed-up equity can be re-invested and generates additional income. This is profitable if you have
Growing portfolios
Profitable portfolios
• You improve the ROE to your shareholders.
Funding
• In certain cases, securitization provides cheaper funding (currently rather the exception).
Becomes more relevant if maturity mismatches (and resulting Pillar 2 capital charges) are considered
• In the long run, access to dis-intermediated funding sources will become crucial.
Our Fundamental Business Motivation
10
Without
Securitization
With
Securitization
Securitization &
Re-Investment
Assumptions
Portfolio Volume 100.000 100.000 266.667
Net Asset Margin (in %) 1,50% 1,50% 1,50%
CAR 8% n.a. n.a.
First Loss Piece 3,00% 3,00%
Conventional Funding Spread 5 yrs 0,25% 0,25% 0,25%
All-in Securitisation Spread (in %) 0,75% 0,75%
Profit & Loss
Net Asset Margin 1.500 1.500 4.000
Less Incremental Securitisation Cost -500 -1.333
Net Profit before Tax 1.500 1.000 2.667
Simplistic ROE Calculation
Required Equity 8.000 3.000 8.000
ROE 18,8% 33,3% 33,3%
Securitization improves the ROE
11
2. What are the challenges ?
12
Legal & Regulatory issues
– Transferability of loan portfolios
– Tax/Stamp duty
– Registration of collateral
– Acceptance by the regulator – EU Directives create certain standards
Accounting
– On-balance sheet vs off-balance sheet
Internal target setting mechanisms
– Go for ROE rather than absolute profit and asset targets
Early mover challenges
– Interest from investment banks
– Pricing
Basel 2 considerations
– Focus on portfolios with higher PDs or volatile capital consumption
There are generally challenges:
13
Securitization can be supported by
– Aligning individual legal clauses in the concerned laws
– Drafting a specific securitization law which covers all relevant points
A specific securitization law is generally appreciated by rating agencies
– However, it needs to be to the point in order to really facilitate securitization
Issues to be considered for the Serbian Securitization Act is :
– The act should provide a flexible framework
Reflecting the Basel II Accord
Certain structural issues (foreign vs. domestic SPVs; treatment of synthetic securitizations) are already covered by other provisions
Scope of assets that may be securitized should be determined by market participants
– The framework should allow for cost-efficient structures
The management supervisory model is very similar to the patterns used in regulated industries
Securitization structures used in the international markets should be allowed
Ensuring bankruptcy remoteness in a cost-efficient way is the key element of any such law
Specific Issues in Serbia
14
3. Implications of the
US Sub-prime Crisis
15
US Mortgage Subprime CrisisCEE-markets are fundamentally different – However, we have to learn the lesson!
US Subprime Mortgage Crisis
100
200
300
400
500
06/0
4
09/0
4
12/0
4
03/0
5
06/0
5
09/0
5
12/0
5
03/0
6
06/0
6
09/0
6
12/0
6
03/0
7
06/0
7
09/0
7
-10
0
10
20
30
40
50
60
70
02.0
1
16.0
1
30.0
1
13.0
2
27.0
2
13.0
3
27.0
3
10.0
4
24.0
4
08.0
5
22.0
5
05.0
6
19.0
6
03.0
7
17.0
7
31.0
7
14.0
8
28.0
8
11.0
9
25.0
9
1m AA ABCP Spread
Overweighed investments into subprime market
Major funding through credit wholesale markets Weak credit policy causes deteriorating credit
quality
Market Developments
Increasing customer defaults (Teaser rates) Liquidity shortfall even applying to prime
names Lack of trust and confidence (Counterparty
risk)
Triggers
Manage Exposure according to highest standards
Diversify Funding structure Spread Curve will widen
Conclusions
iTraxx Crossover 5yr
Spread over USD-Libor (2007, in bps)
GM und Ford downgraded
to 'junk bonds'
Subprimedownturn
H1/2007 205 bps
24.Sep:
297 bps
Source: International Index Company, Bloomberg
Source: Federal Reserve, BBA
16
4. What is the future?
17
Western European investors regard CEE as the natural choice for diversifying
their portfolio risks
– The CEE & CIS securitization markets will grow comparably stronger
than the matured markets
Banks will diversify their funding and capital tool box
– Securitization is a useful tool but should not be exaggerated
Securitization plays a growing importance in providing market feedback on
portfolio risks
– Shareholders expect banks to use capital most efficiently and to be
transparent in risk management
What can we expect for the future
18
Thank you!
Georg FeldscherHead of SPM
Raiffeisen International Bank-Holding AGTel. +43-1-71707 1026Fax +43-1-71707 1226
e-mail [email protected]