1 The Hong Kong Mortgage Corporation Limited Securitisation and Banks James H. Lau Jr. Chief Executive Officer The Hong Kong Mortgage Corporation Limited 8 November 2005 ASEAN+3 Workshop ASEAN+3 Workshop The Rise of Asset Securitisation in East Asia The Rise of Asset Securitisation in East Asia
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The Hong Kong Mortgage Corporation Limited 1 Securitisation and Banks James H. Lau Jr. Chief Executive Officer The Hong Kong Mortgage Corporation Limited.
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1The Hong Kong Mortgage Corporation Limited
Securitisation and Banks
James H. Lau Jr.Chief Executive Officer
The Hong Kong Mortgage Corporation Limited
8 November 2005
ASEAN+3 WorkshopASEAN+3 WorkshopThe Rise of Asset Securitisation in East AsiaThe Rise of Asset Securitisation in East Asia
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Contents
Introduction
Major securitisation issues for banks
International accounting standardsBasel II regulatory framework
Issues and implications
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INTRODUCTION: Why securitise?
To improve asset-liability management
To enhance credit risk management
To improve balance sheet, CAR and financial ratios
To expand funding sources and broaden investor base
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What assets to securitise?
Mortgages
Credit card receivables
Auto loans
Corporate loans
Any other assets with cashflow
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Who are the major originators of securitisation products in Hong Kong? The Government, the HKMC, banks, finance companies,
property developers, etc.
Hong Kong Mortgage Corporation (HKMC) is an active and a regular originator of MBS in the Hong Kong market
Risk weights for senior positions and eligible senior IAA exposures
Base risk weight Risk weight for tranches backed by non-granular
pools
AAA 7% 12% 20%
AA 8% 15% 25%
A+ 10% 18% 35%
A 12% 20% 35%
A- 20% 35% 35%
BBB+ 35% 50% 50%
BBB 60% 75% 75%
BBB- 100% 100% 100%
BB+ 250% 250% 250%
BB 425% 425% 425%
BB- 650% 650% 650%
Below BB- and unrated Deduction Deduction Deduction
Note: Banks may apply the risk weights for senior positions if the effective number of underlying exposures (N) is 6 or more and the position is senior. If N is less than 6, the risk weights under Column 4 of the above table apply. In all other cases, the risk weights in Column 3 of the above tables apply.
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Internal Ratings-based approach:Supervisory Formula Approach
Under Supervisory Formula Approach, capital charge for a securitisation tranche depends on five factors:
1. The exposure’s thickness (T)• Ratio of nominal size of the tranche in question to the notional amount
exposures in the pool
2. Credit enhancement level (L)• Ratio of the amount of all securitisation exposures subordinate to the
tranche in question to the amount of exposures in the pool
3. The pool’s reference capital charge (KIRB)
• Ratio of IRB capital requirement including expected loss portion for the underlying exposures in the pool to the exposure amount of the pool
4. The pool’s exposure-weighted average loss-given-default (LGD)
Only for unrated liquidity facilities and credit enhancements related to ABCP programmes
A bank may use its IAA model to evaluate the credit quality of the securitisation exposure it extends to ABCP programme if the assessment process meets the operational requirements
Internal assessments of exposure provided to ABCP programmes must be mapped to equivalent external ratings
Those rating equivalents are used to determine the appropriate risk weights under the RBA
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Major operational requirements for internal assessment process: ABCP must be externally rated The credit quality of the exposures must at least be investment grade at
the beginning of the transaction The internal assessment process must be based on the rating agencies’
methodologies The internal assessment process must identify gradation of risk Banks must perform regular reviews of the internal assessment process
and assess the validity of those internal assessments The bank must track the performance of its internal assessments over time
to evaluate the performance of the process and make adjustment, if necessary
Regulatory authority for banks: treatment of IAS-induced changes
Basel II – for better or for worse
More incentive for elaborate securitisation structure to optimise use of risk capital
Maximise the size of investment grade tranches and minimise the size of sub-investment grade tranches, particularly equity positions, to reduce the utilisation of risk capital
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More issues
Need clear guidelines on whether “significant” risk transfer takes places
Need articulation of “implicit support”
Selection of appropriate elements of IRB approach
Banks may be pressured to sell sub-investment grade tranches to market participants not bound by Basel II