Asset Securitisation Flashcards
What is asset securitisation?
The process of pooling various financial assets and converting them into tradable securities, allowing originators to transfer risks and improve liquidity.
What are the primary learning objectives of asset securitisation?
Understand the securitisation process and its parties.
Analyse its role in financial crises.
Evaluate regulatory strategies focusing on simplicity, transparency, and standardisation.
What are the main benefits of asset securitisation?
Risk diversification.
Improved liquidity.
Capital efficiency.
Customised financial instruments.
Enhanced capital market functioning.
Name the primary parties involved in securitisation.
Originator (e.g., banks).
Special Purpose Vehicle (SPV).
Credit Rating Agencies.
Investors.
What is a Special Purpose Vehicle (SPV)?
A bankruptcy-remote entity that acquires pooled assets from the originator and issues securities to investors, ensuring legal separation from the originator’s balance sheet.
What role do credit rating agencies play in securitisation?
They evaluate the creditworthiness of securities, influencing investor confidence and the pricing of securitised products.
What are Asset-Backed Securities (ABS)?
Tradable financial instruments backed by a pool of financial assets, such as mortgages, auto loans, or credit card receivables.
Define Mortgage-Backed Securities (MBS).
A type of ABS backed by residential or commercial mortgage loans.
What are Collateralised Debt Obligations (CDOs)?
Complex securities backed by a mix of bonds, loans, or other ABS, often structured with senior and junior tranches.
What is the purpose of tranches in CDOs?
To allocate different levels of risk and return, with senior tranches having lower risk and junior tranches offering higher potential returns.
How does securitisation improve liquidity?
By converting illiquid assets into liquid securities that can be sold to investors.
What are the main risks associated with securitisation?
Systemic risk.
Moral hazard.
Complexity in structuring products.
Regulatory gaps.
How did securitisation contribute to the 2007–2009 financial crisis?
By amplifying systemic vulnerabilities through the packaging of subprime mortgages into complex securities like CDOs, which obscured risk levels.
What are the regulatory goals for securitisation?
Simplicity in product design.
Transparency in asset and risk disclosure.
Standardisation of practices and documentation.
What is a prime mortgage?
A low-risk mortgage issued to creditworthy borrowers.
What is a subprime mortgage?
A high-risk mortgage given to borrowers with poor credit histories.
How does securitisation enhance capital efficiency for banks?
By removing assets from their balance sheets, reducing capital reserve requirements.
What is the role of the Basel Committee on Banking Supervision in securitisation?
To coordinate global regulatory efforts, addressing systemic risks and promoting sound practices.
What are the key features of post-crisis securitisation reforms?
Enhanced requirements for credit rating agencies.
Stricter capital reserve rules for securitised assets.
What are the economic benefits of securitisation?
Improved funding for economic activities, risk-sharing across markets, and enhanced market efficiency.
What is the role of investors in securitisation?
To purchase securities from the SPV and earn returns based on cash flows from the pooled assets.
What is a bankruptcy-remote SPV?
An entity insulated from the originator’s financial risks, ensuring asset protection in case of insolvency.
What is the impact of securitisation on financial markets?
It enhances liquidity, diversifies risk, and facilitates efficient capital allocation but may introduce systemic risks if poorly managed.
What is moral hazard in the context of securitisation?
The risk that originators lower underwriting standards, knowing the risk will be transferred to investors.