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Lecture 5: Managing interest rate risk using loan sales and securitisation…
Lecture 5: Managing interest rate risk using loan sales and securitisation
Loan Sales
also called
syndication
involve the
splitting
of larger loans and loan portfolios and
selling
them to FIs and other investors
used by FIs managers to
restructure
their balance sheet
enables bank to make loans that are
too large to hold
on their balance sheet (
banks want to maintain the relationship with customers
)
most loan syndication are undertaken by the
four major banks
or
foreign banks operations
In the US, small banks sell loans to large banks with which they have had a
correspondent banking arrangement
types of contracts (p.13)
participations
loan buyer can exercise only
partial control
over changes in the terms of the loan contract
the buyer has a
risk exposure
to the borrower and the loan selling FI
example: p.14
assignments
all rights transferred on sale of loan
Changing the duration of asset portfolio with a loan sale (p.15)
Why FIs sell loans
Credit risk management
Reserve requirements: reduce the amount of required reserves
Interest rate risk management
Fee income: FI will earn fees when arranging a large loan
Capital costs
(p.17)
Reduce liquidity risk
Broaden a borrower's choice of financing
Factors encourage growth of loan sales (p.18)
Market value accounting
Credit ratings
BIS capital requirements
Purchase and sale of foreign bank loans
Securitisation
Asset securitisation
: packaging and selling of loans, and other assets backed by securities
originally used to
enhance the liquidity
of the residential mortgage market
helps reduce the effect of regulatory taxes such as capital requirements (?)
used to hedge interest rate exposure
Types of securitisation
Collateralized mortgage obligation (CMO)
Mortgage - backed bond (MBB)
Pass- through security