Securitisation
Securitisation is the process of converting tranches of assets, such as residential mortgages, into tradeable securities. Some banks securitise components of their loans for the following reasons;
- Reduce their regulatory capital requirement
- Achieves a lower cost funding source
- Transfers their portfolio credit risk
- Liquidity management
Securitisation options are either “traditional” or “synthetic”.
The traditional method requires the bank to sell tranches of loans to a SPV, the SPV then issues securities, most commonly these are referred to as Mortgage Backed Securities (MBS) or Asset Backed Securities (ABS). The securities come with a credit rating based on the quality of the securities.
Synthetic securitisation involves the use of credit derivatives, where the bank transfers the credit risk by using a derivative instrument, but the exposure itself remains with the bank. This type of derivative is referred to as a credit default swap (CDS).
NZ Banks have been relunctant to utilise securitsation vehicles in the past but have preferred to hold assets on balance sheet. Recently however, some banks have arranged tranches of MBS under the RBNZ facility who agreed to purchase (repo facility) these assets as a result of the recent liquidity crisis. The Australian market for securitsation is a lot more developed.
There are some “rules” around Banks holding capital for “first loss positions” under securitisation plus there are accounting rules around securitised loan books being held “on balance sheet”. I’d be keen on hearing from anyone who can elaborate on these rules – otherwise, Ill attempt to cover them off at a later point.
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Are securitisation structures not also used for liquidity reasons?
@David Hillary – Yep – thanks, I’ll update the post