banks want to get these loans off balance sheet because of regulatory costs c

Banks want to get these loans off balance sheet

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banks want to get these loans off balance sheet because of regulatory costs. c. asset backed commercial paper and CBOs converting risky debt into investment grade debt. allows smaller, riskier companies to get financing they otherwise would have been unable to get. They are backed by predictable and reliable receivables fixes credit issue d. foreign exchange receivable for companies in developing countries Avoiding negative credit substitution E.g. Shitty Turkish company has bad credit, but is owed a lot of receivables/money from a very good German company
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Make an SPV that solely consists of these reliable German receivables, more attractive for investors since all securities are backed by a high-quality asset fixes credit issue e. Music royalties royalties generated by the licensing of copyrighted songs and recordings as a primary form of payment for musicians. creates liquidity for musician. allows them to get money now, and issue securities backed by future revenues from royalties. D. Read “Merrill Lynch, Citicorp and Mellon…” (Item 14.4). 1. What event prompted the banks to set up this program? Tightening of security regulations banks were trying to provide a means of funding to companies with high investment grade ratings but possibly low commercial paper ratings. SEC rule also limited the amount of non-top rated commercial paper that could be bought by mutual funds. So, companies were looking to take out big loans but banks didn’t want to do this bc of new capital rules that limited lending. banks felt pressure from new capital rules to limit lending – program helps customers get loans that bank doesn’t have to put on balance sheet. 2. Why were the banks so anxious to set it up? What is the advantage to them? banks feel pressure from new capital rules to limit lending – program helps customers get loans that bank doesn’t have to put on balance sheet. allows banks to help customers get loans that the banks don’t have to put on their balance sheets or count under the higher capital rules o provides alternate source of funding for investment grade borrowers and an additional source of liquidity for the market o if these are investment grade borrowers, profit and market efficiency will take place Merrill receives commissions on sales of commercial paper from the new company 3. How does the program work? Merrill sells commercial paper issued by a new SPV then lends the proceeds at a slightly higher rate to corporate borrowers referred by the 2 banks involved Citicorp and Mellon Bank Corp.
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Short term loans (short term corporate IOUs) to companies who have had difficulties selling commercial paper Banks who participate have to put up 20% of the loan in case of default 4. Why does the paper the SPV issues have an investment-grade rating when the paper it holds does not?
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