VI. Effects of securitisation on the loan portfolio composition (loan book), credit risk exposure, asset funding of banks and banking regulation.
The Securitization Conduit › Vol. 6 Nbr. 1-4, March 2003
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Summary
Collateralised Loan Obligations (CLOs
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VI. Effects of securitisation on the loan portfolio composition (loan book), credit risk exposure, asset funding of banks and banking regulation.
A. Regulatory Change and Its Effects
Loan securitisation harnesses the adversity of both the current one-size-fits-all regulatory straightjacket and the competition in lending markets, which renders the cost-effective origination of loan for the bank portfolio (especially of investment-grade credits) increasingly difficult. This predicament has prompted banks to consider balance sheet restructuring for purposes of mitigating regulator), capital as well as improving overall economic efficiency (Punjabi and Tierney, 1999). The main channel through which banks arbitraged the regulatory provisions of the 1988 Basle Capital Accord was by securitising their better quality assets and retaining their riskier assets on their own books. Barring future modifications by the Basle Committee the equitable treatment of risk categories under the Capital Accord of 1988 (i.e. a constant capital risk weighting, which does not distinguish between different qualities of loans) still represents a perennial source of regulatory and institutional arbitrage. Consequently, the market for securitised assets grew dramatically from the early 1990s onwards and attracted a large following with all major investment banks for purposes of obtaining capital relief; gaining liquidity or exploiting regulator), capital arbitrage opportunities in the securitisation of loans. Since it is less efficient for banks to retain highly rated loans due to their tight spreads relative to the regulatory capital requirement (unlike high-risk loans with an interest sufficiently high to sustain a flat capital charge), the indiscriminate risk-weighting of loans has led a growing number of national and regional banks to concentrate on the securitisation of investment grade credits, whose inefficient relationship between associated regulatory capital requirements and interest yield constitutes an arbitrage opportunity. Only banks with a developed trading portfolio capability are in the position to remove credit risk of non-investment grade loans from their loan books as a result of this disparity between the re...See the full content of this document
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