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Basel ii and Securitization
Securitization was an efficient
and proven vehicle for regulatory capital arbitrage after Basel I. Securitization is the process through which financial and non-financial assets are packaged into securities that are then sold to investors. The cash flows generated by the underlying assets are used to pay principal and interest on the securities in addition to transaction expenses. All current or future cash flows can be securitized, from mortgage loans, auto loans, credit card receivables, and student loans to aircraft and equipment leases, franchise loans, state tobacco settlement payments, and royalty payment streams. The securitization market is becoming more sophisticated. Securitization transfers credit and interest rate risk, increases liquidity, and improves capital ratios. In securitization we try to separate the credit risk of the asset pool that is being securitized from the credit risk of the originator. The originator sells a pool of assets to a Special Purpose Entity (SPE), which then issues securities to investors. Basel ii recognizes both, Traditional and Synthetic Securitizations In a traditional securitization, the originating bank transfers a pool of assets that it owns to a special purpose vehicle. The assets are placed beyond the control of the originating bank, and the originating bank must obtain a legal opinion that the assets are beyond the reach of the bank and its creditors. In a synthetic securitization, the originating bank transfers only the credit risk associated with an underlying pool of assets through the use of credit-linked notes or credit derivatives. The originating bank retains legal ownership of the pool of assets. Synthetic securitizations must be such that they replicate a transfer of assets. So, for example, any condition that transfers risk back to the originating bank or increases the cost to the originating bank as a result of any asset deterioration is not permitted. Basel II contains a list of particular clauses that may not be included in the instruments that establish the credit risk transfer. Under Basel II, an originating bank must obtain a legal opinion that confirms the enforceability of the contracts establishing the structure. -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Credit Risk — Securitisation Framework A. Scope and definitions of transactions covered under the securitisation framework 538. Banks must apply the securitisation framework for determining regulatory capital requirements on exposures arising from traditional and synthetic securitisations or similar structures that contain features common to both. Since securitisations may be structured in many different ways, the capital treatment of a securitisation exposure must be determined on the basis of its economic substance rather than its legal form. Similarly, supervisors will look to the economic substance of a transaction to determine whether it should be subject to the securitisation framework for purposes of determining regulatory capital. Banks are encouraged to consult with their national supervisors when there is uncertainty about whether a given transaction should be considered a securitisation. For example, transactions involving cash flows from real estate (e.g. rents) may be considered specialised lending exposures, if warranted. 539. A traditional securitisation is a structure where the cash flow from an underlying pool of exposures is used to service at least two different stratified risk positions or tranches reflecting different degrees of credit risk. Payments to the investors depend upon the performance of the specified underlying exposures, as opposed to being derived from an obligation of the entity originating those exposures. The stratified/tranched structures that characterise securitisations differ from ordinary senior/subordinated debt instruments in that junior securitisation tranches can absorb losses without interrupting contractual payments to more senior tranches, whereas subordination in a senior/subordinated debt structure is a matter of priority of rights to the proceeds of liquidation. 540. A synthetic securitisation is a structure with at least two different stratified risk positions or tranches that reflect different degrees of credit risk where credit risk of an underlying pool of exposures is transferred, in whole or in part, through the use of funded (e.g. credit-linked notes) or unfunded (e.g. credit default swaps) credit derivatives or guarantees that serve to hedge the credit risk of the portfolio. Accordingly, the investors’ potential risk is dependent upon the performance of the underlying pool. 541. Banks’ exposures to a securitisation are hereafter referred to as “securitisation exposures”. Securitisation exposures can include but are not restricted to the following: asset-backed securities, mortgage-backed securities, credit enhancements, liquidity facilities, interest rate or currency swaps, credit derivatives and tranched cover. Reserve accounts, such as cash collateral accounts, recorded as an asset by the originating bank must also be treated as securitisation exposures. 542. Underlying instruments in the pool being securitised may include but are not restricted to the following: loans, commitments, asset-backed and mortgage-backed securities, corporate bonds, equity securities, and private equity investments. The underlying pool may include one or more exposures. --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Course Title Basel ii and the new Securitization Framework Two days Objectives: This course has been designed to provide with the knowledge and skills needed to understand the structured finance industry and the traditional and synthetic securitizations after the Basel ii Accord Target Audience: This course is intended for senior managers and professionals involved in securitization - from strategy and decision making to capital allocation This course is highly recommended for management consultants. Duration: Two days (09:00 - 17:00). It can be tailored to your needs. Course Description Introduction - what is securitization Structured Finance and Securitization Structured Credit Products and Repackaged Securities Mechanics of Securitization Use of Special Purpose Entities (SPE) Traditional versus Synthetic Securitization Collateralized Debt Obligations Mortgage-Backed Securities Asset-Backed Securities Public Sector Securitizations Corporate Securitizations Arbitrage opportunities Securitization before Basel i The opportunities after the implementation of the Basel i Accord Securitization after Basel ii Scope and definitions of transactions covered under the Securitization framework Capital allocation challenges Securitization in Europe after Basel ii and the Capital Requirements Directive Securitization in the USA Securitization and the Offshore Financial Centers Securitization and the world Challenges and opportunities What is next The presentation can be customized to meet specific needs. To learn more: www.basel-ii-securitization.com -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
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