Technische Universität München Credit as an Asset Class - risklab

CHAPTER 2. CREDIT RISK TRANSFER
Figure 2.7: Basic structure of a securitisation
the asset pool or its risk, funded by the issuance of ABS. The originator can often serve
as servicer, who is responsible for the management of the asset pool, partly including the
regular collection of instalments from the borrowers, and for regular reportings for investors
and rating agencies in return for a servicing fee. The trustee represents the investors’
interests. He supervises the regularity of the SPV and the asset pool management. In
addition, he also supervises the accomplishment of regular reports and verifies losses.
Sometimes, he is responsible for the payments to the investors such as shown in Figure
2.7. These tasks are often performed by an independent chartered accountant.
In general, ABS are issued in different risk classes, so-called tranches. In order to be
able to place the securities in the capital market, it is necessary to get the tranches rated
by a large rating agency. The agency regularly monitors the risk involved in the single
tranches and adjusts the rating if necessary.
Ratings can be influenced and improved by so-called credit enhancements. Credit
enhancements are a distinctive feature of securitisations, unlike conventional corporate
bonds, which are often unsecured. Through a credit enhancement, a security’s or tranche’s
credit quality is raised above that of the underlying asset pool. We can distinguish between
a variety of internal and external enhancements that are used to limit specific risks 70
accruing from a securitisation and to decrease the probability of default in the tranches.
The internal enhancements arise from the asset pool or the involved parties, examples
are subordination, overcollateralisation, excess spread and cash reserves. External credit
enhancements are provided by a third party. Examples are financial guarantees, letters of
credit, credit insurances and cash collateral accounts. 71
70 These are explained in Section 2.4.4.
71 For a detailed description of these credit enhancements, we refer for example to [Oes04], pp. 22-23,
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