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Securitization and Asset-Backed Securities (ABS) Market. June 8-11, 2004 Colombo, Sri Lanka Noritaka Akamatsu Financial Sector Operations & Policy The World Bank. Outline. What & Why? Technical issues Demand and Supply Policy framework. What is Securitization?.

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slide1

Securitization and Asset-Backed Securities (ABS) Market

June 8-11, 2004

Colombo, Sri Lanka

Noritaka Akamatsu

Financial Sector Operations & Policy

The World Bank

outline
Outline
  • What & Why?
  • Technical issues
  • Demand and Supply
  • Policy framework
what is securitization
What is Securitization?

Securitization is a generic term for a transaction in which future cashflows or financial assets are pooled into tradable and liquid securities or other obligations.

By pooling assets, it diversifies and reduces risks of the portfolio and, with additional credit enhancement arrangement, can produce highly creditworthy instruments to market.

traditional securitization structure
Traditional Securitization Structure

ORIGINATOR (assets)

Transfer of assets from originator

Proceeds from sale of securities / obligations

SPV

Securities /

Obligations

Funds

INVESTORS

assets cashflows for securitization
Assets / Cashflows for Securitization
  • NPLs
  • Residential mortgage
  • SME loans
  • Infrastructure projects (credit and cash flows)
  • Auto loans
  • Credit card receivables
  • Trade receivables (cash flows)
  • Receivables under aircraft and equipment lease (cash flows)
  • Etc., etc.
slide6

Figure 3.3: Rated Cross-Border Asset Securitizations

in 2001

Whole business

Auto loan

9.1%

receivables

6.8%

Line of credit

receivables

CBOs

11.0%

22.0%

Corporate loans

Leases and loans

4.5%

10.1%

Credit card

receivables

36.4%

Source: Moody's

slide7

Figure 3.1: Emeging Asia Securitized and Non-Securitized

Corporate Issuance, 1995-2000 (US$ million)

40,000

Securitized bonds

Non-Securitized Bonds

30,000

20,000

10,000

-

1995

1996

1997

1998

1999

2000

Source: HKMA,

Further Study on Securitization and Credit Enhancement in Asia

slide8

Figure 3.2: Growth of East Asian Asset-Backed Market,

1995-2000 (US$ billion)

14

Korea

Thailand

12

Singapore

Malaysia

10

Indonesia

Hong Kong

8

6

4

2

-

1995

1996

1997

1998

1999

2000

Source: HKMA,

Further Study on Securitization and Credit Enhancement in Asia

why securitize
Why Securitize?
  • Efficient resource allocation
  • Supporting problem resolution and financial stability
    • NPLs
  • Economic growth
    • Infrastructure finance
    • SME financing
efficient resource allocation
Efficient resource allocation
  • Cash-poor lenders sell credits to cash-rich investors in the form of marketable securities.
    • Housing mortgage loans
    • Auto loans
    • Credit cards
supporting problem resolution and financial stability
Supporting problem resolution and financial stability
  • Tool to assist in disposal of NPLs
    • Banks can remove NPLs from their books by securitising them into marketable instruments.
    • Transaction can be structured into attractive investment.
  • Reduce concentration risk of banks in mortgage lending (a financial stability factor).
economic growth
Economic Growth
  • Facilitate SME financing
    • Banks will be more willing to lend to SMEs if they can free up credit lines through securitising.
    • Control exposure to SME risk while making new loans
  • Mechanism to raise finance for infrastructure
    • Project cashflows secure securities in international and domestic markets
    • Lower cost, higher quality, longer maturity
  • Support the growth of mortgage market
    • Provision of housing finance at competitive cost
experiences with bond market development
Experiences with bond market development
  • Must corporate bond markets develop first?
    • Not necessarily as long as benchmarks exist, i.e., money and government securities markets.
  • The legal, accounting and tax regimes must be made supportive.
  • Does securitization entail new risks?
    • Operational risks exist with servicers. However,
    • It reduces and diversifies financial system and instrument risks.
    • Better quality asset than basic corporate bonds – logical progression in terms of risk
technical issues
Technical Issues
  • Legal
  • Regulatory
  • Taxation
  • Accounting
  • Credit information and guarantees
  • Market infrastructure
  • Pricing and interest rate
typical legal impediments
Typical Legal Impediments

Check points:

  • “True sale” and bankrupty remoteness – achieving risk separation with SPV
    • Civil code vs. Common law
  • Procedures required for formalization of transfer of assets
  • Recognition of ABS as “securities”
true sale and risk separation
“True Sale” and Risk Separation
  • Two typical forms of SPV
    • SPC: Is it possible under company and securities laws?
    • Trust
  • Common issues with Trust Law
    • Number of beneficiaries required, qualification of trustees, trust registration process, etc.
    • Interpretation / explanation and implementing rules to resolve problems
  • Consider ABS Law
    • Often effective in overcoming many impediments in a civil code jurisdiction (e.g., Korea)
transfer of assets
Transfer of assets
  • Impediments to asset transfer typical of civil law jurisdictions, especially:
    • Notification
    • Registration
  • Need to reduce costs and difficulties of notification and registration
  • Possible remedies
    • Interpretation / explanation of Trust Law
    • Regulations on registration; e.g., objection period and process, transfer of security, mortgage registration
sale of securities obligations
Sale of securities / obligations
  • Issue of securities / obligations
    • Transfer / distribution of trust beneficiary interest can be problematic if it is not considered as “securities” under the securities law.
  • Allow trust companies to issue securities and/or beneficiary certificates
  • Remedies:
    • Interpretation / explanation of Trust Law / Trust Company Law to allow issuance of securities and to clarify that certificates represent an undivided interest in trust assets.
technical issues19
Technical Issues
  • Legal
  • Regulatory
  • Taxation
  • Accounting
  • Credit information and guarantees
  • Market infrastructure
  • Pricing and interest rate
regulatory impediments
Regulatory Impediments

Check points:

  • Approval process
  • Market segments
  • Investor base
  • Capital treatment
approval process
Approval Process
  • Often fragmented and complicated due to fragmentation of authority
    • Bank regulator / Central bank, securities regulator, ministry of finance, ministry of housing / construction, tax authority, etc.
  • Remedies:
    • Clarify roles and responsibilities of each agency.
    • Transparency of processes and requirements
market fragmentation and choice
Market Fragmentation and Choice
  • Exchange or OTC market?
  • Should banks be allowed to act as agents / brokers / dealers (and investors)?
  • Remedies:
    • Determine in which markets ABS to be sold
    • ABS should be sold first among institutional investors only.
restricted investor base
Restricted Investor Base
  • Are institutional investors (insurance, pensions & mutual funds) allowed to buy non-listed securities?
  • Are banks allowed to buy instruments other than public debt?
  • Remedies to widen investor base
    • Banks, insurance companies and funds allowed to purchase ABS in OTC bond market initially, subject to a credit rating requirement.
capital treatment
Capital Treatment
  • Capital adequacy rules for banks in securitsation (e.g. origination and purchase) is needed based on Basel framework.
  • There should not be chances for regulatory arbitrage between the origination and the purchase.
  • Loan classification and provisioning: Need enforceable rules for banks to write down bad loans (not to discourage them from selling NPLs to realize residual value).
technical issues25
Technical Issues
  • Legal
  • Regulatory
  • Taxation
  • Accounting
  • Credit information and guarantees
  • Market infrastructure
  • Pricing and interest rate
taxation issues
Taxation issues
  • Clear tax rules needed on various elements of ABS transaction.
    • Business tax?
    • Income tax?
    • Stamp duty (potentially prohibitive)?
  • General goal: Tax neutrality (i.e., transfer of assets to trust or SPV is not subject to taxation)
accounting framework
Accounting framework
  • Standards for accounting treatment of ABS are needed.
  • Need appropriate accounting standards for on- and off-balance sheet treatment.
technical issues28
Technical Issues
  • Legal
  • Regulatory
  • Taxation
  • Accounting
  • Credit information and guarantees
  • Market infrastructure
  • Pricing and interest rate
credit information system
Credit Information System
  • Information quality: Accounting and disclosure
  • Loan classification and provisioning
  • Credit information bureau system
  • Internal credit management systems
  • Rating agencies
  • Credit guarantees
information quality accounting and disclosure
Information quality: Accounting and disclosure
  • Adequate disclosure by financial institutions and corporations is needed based on international standards.
  • Supporting accounting and auditing services need to gain experience.
credit information bureau
Credit information bureau
  • Credit information bureau system is more than useful for creditors.
  • Do you have one in your country?
banks internal credit management systems
Banks’ internal credit management systems
  • Banks need to develop internal credit management systems to support securitization and subsequent operations as the servicers.
  • Loan documentation needs to be standardized (e.g., mortgage / auto / SME loans)
credit rating and guarantee
Credit Rating and guarantee
  • Need to develop credit rating culture.
    • Consider requiring credit rating for investment in ABS by institutional investors, subject to transparent criteria for recognizing qualified agencies.
  • Rating agencies need a credit information system.
  • Need a credit guarantee industry able to support credit enhancement in securitization.
technical issues34
Technical Issues
  • Legal
  • Regulatory
  • Taxation
  • Accounting
  • Credit information and guarantees
  • Market infrastructure
  • Pricing and interest rate
market infrastructure
Market infrastructure
  • Registration system needed
    • For assets (e.g. real estate) and for security (e.g. mortgages).
    • Multiple pledging must be controlled / prevented.
    • Consider developing a multi-entry point integrated system (to register both assets and security interests)
  • Consider adopting a national guidance to simplify and standardize fees and procedures for registration.
technical issues36
Technical Issues
  • Legal
  • Regulatory
  • Taxation
  • Accounting
  • Credit information and guarantees
  • Market infrastructure
  • Pricing and interest rate
interest rate policy
Interest Rate Policy
  • Spread between interest rate on underlying credit assets and that on the securitized instruments should provide adequate room to cover cost of securitization.
  • Interest rate controls, if any relevant ones, need to be liberalized.
demand and supply
Demand and Supply
  • Supply: Securitizable assets
    • Mortgage credits outstanding in banks.
    • Existing and potential infrastructure project cash flows
  • Disincentives for banks
    • Liquidity in the banking system
    • Capital adequacy
    • Interest rate regulation
  • Demand: asset size and growth of institutional investors
policy actions
Policy Actions
  • Issues cut across areas of responsibilities of many authorities.
    • Central bank, securities regulator, finance ministry, housing/construction ministry, tax authority, etc.
    • Establish an Interagency Committee to support securitization and debt market development.
    • Create a mechanism for consultation with market participants.
  • Plan for short, medium and long term actions.
short term
Short term
  • Taskforce to take stock of existing policy initiatives of various agencies
  • Focus on issues not requiring legislation or institutional development
    • Regulations on MBS (including capital, covering at least transfer and investment), NPL, trading market, etc.
    • Rules on tax, accounting, notification and registration fees and procedures
    • Interpretations / explanations on Trust Law, Mortgage Law, etc.
medium long term
Medium / Long term
  • Introduce ABS Law
    • SPV, asset transfer, securities issuance
  • Develop ABS support structures
    • 2ndary mortgage corporation, etc.
  • Develop a credit guarantee industry.
  • Amend Company and Securities Laws
    • Bring ABS into the securities framework and part of public markets
    • Amend Company and/or Securities Law rather than in ABS Law to allow shell companies to issue debt.
  • Develop an integrated registration system