Banking New Methods II Flashcards
Securitization
* Pooling of …
* Principal and interest is …
* Securitization involves:
– – –
(i) … (pooling)
(ii) … (tranching)
(iii) …
various types of debt (mortgages, auto loans, credit card debt obligations) and selling the consolidated debt to investors.
paid back to the investors regularly.
combining loans of similar characteristics
creating different classes of claims
selling these claims to investors
Key features of Securitization
* Bankruptcy remoteness: …
* Pooling: …
* Tranching: Issuance of …
Investors purchase claims against the assets that are securitized, not against the bank’s entire portfolio.
Loans of are combined to asset portfolios.
different classes of claims (in terms of seniority and/or maturity)
Process of securitization
slide 23
Pooling
* Diversification benefits where …
* This would help attract …
* Reduction of …
* Rather than engaging in 1 million loan sales, …
idiosyncratic risk can be eliminated by pooling the assets.
uninformed (or very risk-averse) investors.
transaction costs
pool the loans and engage in only one sale.
Tranching
* Creating different financial assets with …
* Senior, mezzanine, junior tranches.
* Returns from the pool of assets is …
* Once …
* When both senior and mezzanine tranches are paid in full, junior tranch gets paid.
* Senior tranch can be risk-free!
different risk characteristics.
used to pay the senior tranch first.
senior tranch paid in full, mezzanine tranch gets paid.
Benefits of securitization
* Credit risk transfer
– Traditional banking model: …
– Risk can be transferred broadly in the financial system. Prevents risks …
- Capital relief:
– … - Increased liquidity
– Through securitization assets that were not traded prior to securitization are … - Diversification of funding
– Allows the bank to…
Originate and hold on the balance sheet.; getting concentrated on banks’ balance sheet.
Free up capital on banks’ balance sheets and facilitate lending.
traded in an active secondary market.
raise financing from sources other than the traditional sources, like deposits
New Banking Model
Slide 27
Dark side of securitization
* Banks’ incentives to …
* Since assets do not stay with the originating bank, the bank does not …
* Furthermore, the bank may not …
* …
screen and monitor can be eroded.
have incetives to monitor these loans properly.
have incentives to screen the borrowers in the first place.
Over-expansion of risky loans.
New banking model
* Originate and distribute, rather than …* Hold …
*Liability side:
*Traditional bank: …
*New model:…
hold the assets on the balance sheet. ; less capital.
Rely on insured deposits. Insured deposits are sticky.
Rely on short-term wholesale funding – Repo (even over night)
new banking model/where does it all end?
check slide 27/29
