Chap26_Saunders7e_SECURITIZ_SLIDES

Chap26_Saunders7e_SECURITIZ_SLIDES - CH-26...

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Unformatted text preview: CH-26 SECURITIZATION-7ED OVERVIEWSecuritization is another mechanism that may be employed by FIs to manage their risk exposure and improve liquidity.This chapter explores the role of securitization in improving the risk-return trade-off. The three major forms of asset securitization, and its mortgage lending origins, are also explained.26-1INTRODUCTIONSecuritization: Packaging and selling of loans and other assets backed by securitiesMany types of loans and assets are being repackaged in this fashionOriginal use was to enhance the liquidity of the residential mortgage marketSeparates the risk of assets from lendingPerverse incentive effects instrumental in creating the financial crisis banks minimized skin in the game, shifted risk,left investors holding the bag.26-2CONVERSION OF ON-BALANCE-SHEET ASSETS TO SECURITIESCreation of special purpose vehicle, or SPV, to facilitate the removal of assets from the balance sheetSPV earns fees from creation and servicingAll cash flows pass through the SPV according to terms of the ABS contractSPV exists until cash flows from the assets are fully distributed (one type of SPV)Structured investment vehicle, or SIV, issues commercial paper to purchase bank loansSIV essentially an asset-backed security26-3TRADITIONAL PROCESS USING SPV26-4STRUCTURED INVESTMENT VEHICLESSIV responsible for payments on its ABCP obligations even if underlying assets do not generate sufficient cash flowsWhen the cash flows exceed costs, the SIV keeps the spreadUsually has lines of credit or loan commitments from sponsoring bankLiquidity risk implications & exposure to runs26-5TRADITIONAL PROCESS USING SIV26-6SPECIAL PURPOSE ENTITIESProfitability of SPVs and SIVs hinges on maintaining high credit ratingProminent role in the 2008-2009 financial crisis...
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This note was uploaded on 11/10/2011 for the course ECON 4620 taught by Professor Victorwakeling during the Fall '11 term at Kennesaw.

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Chap26_Saunders7e_SECURITIZ_SLIDES - CH-26...

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