Treasury / Liquidity Management

Question 1

Securitization

Answer 1

Take the asset and sell them on the secondary market –> bundle the assets before selling them

Question 2

Mortgage-backed-securities (MBS)

Answer 2

Seciritized mortgage loans to create and expand a secondary market for mortgages for banks to sell their mortgages, free-up balance sheets and issue new mortgages.

Question 3

Creation of US institutions

Leading to the financial crisis

Answer 3

1930s:
- “Home Owner’s Loan Corporation”: introduction long-term fixed-rate mortgage financing
- Federal Housing Administration (FHA): offer federally backed insurance for home mortgages

1938:
- Fannie Mae: government agency to act as a secondary mortgage market facility that could purchase, hold, and sell FHA-insured loans

1968:
- Ginnie Mae: government agency that, for a fee, guarantees timely payment of principal and interest on privately issued MBS, collateralized by the FHA

1970:
- Freddie Mac (Federal Home Loan Mortgage Corporation): (i) purchase long-term mortgages from thrifts to reduce their interest rate risk, (ii) increase competition for newly privatized Fannie Mae, (iii) expand secondary MBS market

»> Authorization of Fannie Mae and Freddie Mac to buy and sell mortgages not insured or guaranteed by the federal government

»> Acquisition of large Alt-A volumes: Mortgages with incomplete documentation of borrower’s income, higher loan-to-value or debt-to-income ratios (2004-2007)

Question 4

Collateralised debt/loan obligations (CDO/CLO)

Answer 4

Pooled corporate loans with no asset-like grouping

Question 5

Business Model of a Bank

Answer 5

• Take in deposits from customers (liabilities) - enable safe keeping for money
• Provide loans to clients who seek funding (assets) - provide loans

Question 6

Banks make money thorugh…

Answer 6

• Spread/margin business: difference between deposit and loan interest rates
• Tenor transformation: higher interest rates on longer term loans
• Additional revenue streams: payment and account services, fx transactions, …

Question 7

Capital Requirement Ratios

Answer 7

Hold enough equity to cope with unexpected losses

• Risk Weighted Assets (RWA)
• Leverage Ratio Denominator (LRD)

Question 8

Liquidity Requirement Ratio

Answer 8

Enough liquidity to always pay back deposits and cover short-term liabilities

• Liquidity Coverage Ratio (LCR)

Question 9

Funding Requirement Ratio

Answer 9

Enough stable (long-term) funding sources for long-term assets

• Net Stable Funding Ratio (NSFR)