Technische Universität München Credit as an Asset Class - risklab

CHAPTER 2. CREDIT RISK TRANSFER
MBS for example have only little credit risk, as they are highly collateralised; in case of
default, the recovery value is very high.
2.4.3 Reasons for the Utilisation of Securitisations
In this section, we illuminate the reasons for investors to use securitised products. We
differentiate between the specific reasons for financial institutions, as they are the main
market driver, and general reasons for investors to engage in these products.
Motivation for Financial Institutions to use Securitisations
For banks, the utilisation of securitisations is appealing for several reasons.
• Risk diversification – The risk transfer of a securitisation can be used to restructure
the loan portfolio of a bank under risk-return considerations and to deliberately re-
duce risk or to enter into new risks. This is reasonable for example, if a bank has
considerable concentrations of credit risk in a certain region or vis-à-vis a certain in-
dustry. Such concentrations can be reduced by securitising a fraction of the portfolio
or by investing in securitised products concentrating on other regions or industries.
Hence, securitisation can be used to manage credit risk exposure.
• Liquidity – By selling parts of their loan portfolio, banks can raise liquidity for
potentially better conditions than raising it over the capital market as debt. This
might be particularly interesting for banks that do not have a first-class credit rating.
• Capital relief – Transferring credit risk to third parties, can imply both an economic
and a regulatory capital relief. Thus, flexibility is created for other risk-bearing
activities.
• Management of balance sheet and cost structure – Through securitisation, banks can
improve their risk and cost structure for example by generating nearly risk-free com-
mission earnings while reducing total assets. Hence, they achieve an improvement
of performance figures. 72
Due to harmonisation and internationalisation of markets, these motivations will prob-
ably become more and more important for banks and so lead to an increasing use of
securitisation.
However, from a bank’s point of view, there are some drawbacks with respect to
securitisation:
• Large parts of a bank’s portfolio might be unsuitable for securitisation in case of non-
funded types of exposure, for instance revolving credits, lines of credit or derivatives.
• Securitisations might be subject to restrictions. Notifications or approval by bor-
rowers can be required which might damage the client relationship.
• The economic and regulatory capital relief might be limited as banks often hold a
large proportion of the equity tranche. Then, only a small part of the credit risk
exposure is transferred.
72 See [Oes04], p. 9, [Das06], pp. 851-852, [Bom05], pp. 30-31 and [Deu97], p. 58.
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