3630 Week12 lecture bigslides

3630 Week12 lecture bigslides - SECURITISATION FINS3630...

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SECURITISATION FINS3630 Lecture 12 Chapter 21
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Overview 21-2 This chapter discusses the concept of asset securitisation. We discover why banks and other FIs are using this ‘technology’ to transform their balance sheets. We examine the nature and significance of prepayment risk. We learn some of the different forms of securitisation available to FIs.
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Introduction 21-3 Securitisation is the packaging and selling of loan assets and other assets backed by securities. In Australia, between 2000 and 2004 one quarter of all housing loans were securitised.
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The Mechanism of Pass-Through Security
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The securitisation program in US and Australia 21-5 Original use as government-sponsored programs in US in 1970s to enhance the liquidity of the residential mortgage market. The program was firstly used in Australia in 1980s to facilitate low-cost finance to low-income borrowers. Three key programs: FANMAC Premier Trust (NSW), Keystart Bond Program (WA), Victorian Housing Bond Program (VIC). Strong credit support from respective governments and resulting high credit ratings. The private securitisation program was developed in early 1990s in Australia.
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21-6 Example: Bank originates 100 new fixed-rate residential mortgage loans. Average size per mortgage loan: $300,000. Size of mortgage portfolio: $30 million. Average mortgage rate: 8% p.a. with an average maturity of 30 years. Capital requirement: $30 million × 50% × 8% = $1.2 million. Assume the bank holds 5% of the value of the loan portfolio, i.e. $1.5m as cash reserves. Assume that remaining funds, i.e. $30m + $1.5m – $1.2m = $30.3m are raised through demand deposits. Issues for bank: Illiquidity, Large positive duration gap (D A > kD L ), Large regulatory burden: capital requirement, reserve requirement and deposit insurance premium. Solution: securitisation, because of homogeneity of assets and credit enhancement.
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3630 Week12 lecture bigslides - SECURITISATION FINS3630...

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