Mbf 705 legal and regulatory aspects of banking supervision
This presentation is the property of its rightful owner.
Sponsored Links
1 / 29

MBF-705 LEGAL AND REGULATORY ASPECTS OF BANKING SUPERVISION PowerPoint PPT Presentation


  • 109 Views
  • Uploaded on
  • Presentation posted in: General

Session: Three. MBF-705 LEGAL AND REGULATORY ASPECTS OF BANKING SUPERVISION. OSMAN BIN SAIF. Summary of Previous Session. General principles of banking regulation Minimum Requirement Supervisory review Market Discipline Banking Crises

Download Presentation

MBF-705 LEGAL AND REGULATORY ASPECTS OF BANKING SUPERVISION

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Mbf 705 legal and regulatory aspects of banking supervision

Session: Three

MBF-705LEGAL AND REGULATORY ASPECTS OF BANKING SUPERVISION

OSMAN BIN SAIF


Summary of previous session

Summary of Previous Session

  • General principles of banking regulation

    • Minimum Requirement

    • Supervisory review

    • Market Discipline

  • Banking Crises

    • Banking system (Operations, potential Problems, Criticality)

    • Institutional investors

      • investment banks

      • Pension Funds

      • Hedge funds

    • Central Bank. US Example

    • Government Securities / Bonds


Agenda of this session

Agenda of this session

  • Credit rating agencies

  • Mortgage Brokers

  • Secondary Mortgage Markets

  • The Mess

    • Evolution of Home Mortgage

    • New model of Mortgage lending

    • Private sub prime mortgage process

    • Reasons for forming of subprime mess


  • Credit rating agency cra

    Credit Rating Agency (CRA)

    • Company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves

    • A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued


    Credit rating agency contd

    Credit Rating Agency (Contd.)

    • Ex: Moody's (U.S.), Standard & Poor's (U.S.)

    • Credit ratings are used by investors, issuers, investment banks, broker-dealers, and governments.

      • For investors, credit rating agencies increase the range of investment alternatives and provide independent, easy-to-use measurements of relative credit risk.


    Mortgage broker

    Mortgage Broker

    • Mainly found in developed economies like US, Western Europe

    • Professionals who are paid a fee to bring together lenders and borrowers

    • Sells mortgage loans on behalf of businesses (ex. Banks)


    Mortgage broker contd

    Mortgage Broker (Contd.)

    • Tasks undertaken:

      • Marketing to attract clients

      • Assessment of the borrowers circumstances (Mortgage fact find forms interview). This may include assessment of credit history (normally obtained via a credit report) and affordability (verified by income documentation)

      • Assessing the market to find a mortgage product that fits the clients needs (Mortgage presentation/recommendations)


    Mortgage broker contd1

    Mortgage Broker (Contd.)

    • Applying for a lenders agreement in principle (pre-approval)

    • Gathering all needed documents (paystubs / payslips, bank statements, etc.),

    • Completing a lender application form

    • Explaining the legal disclosures

    • Submitting all material to the lender


    Sub prime mortgage what s that

    Sub-prime mortgage – What’s that?

    • Home loans made to borrowers with poor credit ratings — a group generally defined by FICO scores below 620 on a scale that ranges from 300 to 850


    Sub prime mortgage contd

    Sub-prime mortgage (Contd.)

    • FICO - a number that is based on a statistical analysis of a person's credit report, and is used to represent the creditworthiness of that person.

      (FICO is the acronym for Fair Isaac Corporation, a publicly-traded corporation (under the symbol "FIC") that created the best-known and most widely used credit score model in the US.)

    • Creditworthiness—the likelihood that the person will pay his or her debts. Calculated by credit reporting agencies.

      Ex. Equifax, Experian, and TransUnion in US


    Secondary mortgage markets

    Secondary Mortgage markets

    • The secondary mortgage market allows banks to sell mortgages, giving them new funds to offer more mortgages to new borrowers.

    • If banks had to keep these mortgages the full 15 or 30 years, they would soon use up all their funds, and potential homebuyers would have a more difficult time to find mortgage lenders.


    Secondary mortgage markets contd

    Secondary Mortgage markets (Contd.)

    • Many of the mortgages on the secondary market are bought by Fannie Mae.

    • Other are packaged into mortgage-backed securities, and sold to investors.


    Now we are ready to look into the mess

    Now we are ready to look into the mess !


    Evolution of home mortgage

    Evolution of home mortgage

    Home loan funding

    1930s

    Principal + interest payable over long term

    Borrower-Individuals

    Lender-Banks

    • Owning a house was not affordable to many

    • Great Depression brought industry to a halt. Large scale defaulters and lenders could not recover by reselling


    Evolution of home mortgage contd

    Evolution of home mortgage (Contd.)

    • To simulate the industry again Government as part of New Deal policy created the Federal National Mortgage Association (Fannie Mae) in 1938. This created a secondary market for mortgages

    Bought loan

    Home loan funding

    Principal + interest payable over long term

    Cash

    Transfer of credit risk, market risk

    Borrower-Individuals

    Lender-Banks

    Had Access to long term borrowing

    Bought only those which conformed to certain underwriting standard ( called Prime Mortgages)


    Evolution continued

    Evolution continued…

    • Fannie Mae proved very successful . But by 1960s , borrowing done by it constituted a significant share of the debt owed by US government.

    • 1968- Government National Mortgage Association (Ginnie Mae) was created to handle government guaranteed mortgages.

    • Fannie Mae became federally chartered, privately held


    Evolution continued1

    Evolution continued

    • 1970- Ginnie Mae developed MBS (Mortgage backed by Securities) -- shifted the market risk to investors -- eliminated debt incurred to fund government housing program

    • 1970-Federal National Mortgage Corporation (Freddie Mac) created

      • To securitize conventional mortgages

      • Provide competition to Fannie Mae


    Evolution continued2

    Evolution Continued

    • Over time Fannie Mae and Freddie Mac together provided enormous amount of funding for US mortgage

    • Since Fannie Mae and Freddie Mac guaranteed loans, much of credit risk stayed with them. Size and diversification allowed them to handle it.


    New model of mortgage lending

    New Model of mortgage lending

    Bought loan

    Home loan funding

    Cash

    Transfer of credit & market risk

    Lender-Banks

    Principal + interest payable over long term

    Securitization fees

    SPV

    Cash

    MBS

    Transfer of market risk


    New model of mortgage lending contd

    New Model of mortgage lending (Contd.)

    • Advantages

      • More liquidity in market

      • Risk spread out

      • Long term funding for mortgage lending

      • MBS- allows originators to earn fee income from underwriting activities without exposure to credit, market or liquidity risks as they see the loans they make


    Further evolution

    Further evolution..

    • 1977- Private label securitization started first done by BOA and Salomon Brothers

    • 1980s- pricing, liquidity and tax hurdles were resolved in same

    • Unlike 2-3 party , private label securitization has 10 or more different parties playing independent role


    Further evolution1

    Further evolution

    • Big private players in this field were

      • Wells Frago

      • Lehman Brothers

      • Bear Stearns

      • JP Morgan

      • Goldman Sachs

      • Bank Of America


    Details private sub prime mortgage process

    Details : Private Sub-prime mortgage process

    • 1. Brokers identify borrowers

    • 2. Originator and broker identify a loan for borrower after looking at his credit rating

    • 3. Formal application for loan by borrower

    • 4. Originator transfers the loan to the subsidiary of an investment banking firm ( Seller)

    • 5. Seller(Investment bank) collects a pool of loans and call it as SPV. Off balance sheet instrument


    Details private sub prime mortgage process contd

    Details : Private Sub-prime mortgage process (Contd.)

    • 6. SPV can be a corporation, partnership or limited liability company. Most often a Trust. It has nothing else except mortgage loans

    • 7. Underwriter purchases all the securities (derivative income streams)

    • 8. In designing SPV and its tranches underwriter works with credit rating agencies


    Details private sub prime mortgage process contd1

    Details : Private Sub-prime mortgage process (Contd.)

    • 9. Underwriter then sells the securities to the investors

    • 10. High rated tranches might be guaranteed by a 3rd party insurance company

    • 11. Seller also arranges to sell the rights to service the loan pool to a company or sometimes Originator takes these rights

    • 12. MERS – document custodian. Company to keep track of mountains of paper work on loans in the pool. At National level.


    Reasons for forming of subprime mess

    Reasons for forming of Subprime mess

    • Giant pool of money available for investment through savings of Oil exporters , economic development in BRIC countries.

    • Private share in mortgage market growth in large part through origination and securitization of high risk sub-prime and Alt-A mortgages.

    • Building up of the housing bubble

    • Private Banks made use of CDOs to sell to investors


    Reasons for forming of subprime mess contd

    Reasons for forming of Subprime mess (Contd.)

    • Lax regulations which did not keep pace with the innovations happening in financial engineering

    • US kept interest rates too low for too long in post dotcom bust period

    • Hedge funds, Wall street firms and instructional investors found lower tranches in MBS and CDO attractive which were highly risky

    • Hedge funds leverage ratio of the order of 500%.

    • To sum up in 3 words as noted by Harvard dean: Leverage(high), Transparency (low) and Liquidity (abundant)


    Summary of this session

    Summary of this Session

    • Credit rating agencies

    • Mortgage Brokers

    • Secondary Mortgage Markets

  • The Mess

    • Evolution of Home Mortgage

    • New model of Mortgage lending

    • Private sub prime mortgage process

    • Reasons for forming of subprime mess


  • Thank you

    THANK YOU


  • Login