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INFOGRAPHIC: demystifying securitisation

Securitisation. It is a word often heard in financial industry circles but one seldom understood with any precision. 

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The word securitisation can reawaken ghosts of the Global Financial Crisis (GFC) past - but has this reputation of securitisation as the malicious instigator of the 2007 – 08 GFC been unfairly assigned? 

" The GFC started with poor lending practices in the US mortgage and auto loan markets, before evolving into a global liquidity crisis and recession.”Bluenotes spoke with Graham Metcalf, Head of Structured Capital Markets at ANZ Institutional, to understand more and demystify some lingering securitisation myths. We also break down the securitisation process into an easy to digest infographic.

What exactly is securitisation?

GM:  Securitisation involves combining financial assets such as mortgages, car leases or small business loans into a single “pool” of loans and then issuing debt securities. Holders of these securities are repaid as these loans are repaid.

The performance of these debt securities is determined by the repayments from these pools of loans rather than on the financial institution or the company that made the loans in the first place.

It is a long standing form of financing used by financial institutions and corporates. Securitisation is also a major industry with over US$10 trillion of securitised debt currently on issue. The process is used extensively in the USA (around 85 per cent of the global market), Europe and Asia. In Australia it is an $AU120 billion market.

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Why do banks do it?

GM: Banks fund themselves (in order to make loans etc.) by using deposits or debt raised on global capital markets. Securitisation provides another source of funding as banks raise funds in securitising their pools of loans.

Securitisation can also have some capital benefits for banks and is used for credit portfolio management in some countries. That’s because banks don’t need to hold the same capital against loans moved into securitised securities.

In Australia it is used by large banks, regional banks, small banks, credit unions and non-bank lenders to help fund their mortgage lending activities. It is used more extensively by institutions that cannot fund themselves by taking deposits – typically non-bank lenders - than by authorised deposit taking institutions (such as banks).  

How much does ANZ do?

GM: ANZ has less than $AU1.2 billion of securitised debt on issue to institutional investors, about 1 per cent of ANZ’s wholesale funding. The underlying assets are Australian home loans but less than 1 per cent of ANZ’s total home loan portfolio (six loans in every 1,000). ANZ also has a business that helps other financial institutions and corporates manage and operate securitisation programs.

Didn’t it cause the GFC?

GM: No, though it has taken a lot of the blame. The GFC started with poor lending practices in the US mortgage and auto loan markets, before evolving into a global liquidity crisis and recession. The link with securitisation is that many of these “sub-prime” loans were pooled together into securitisation funding vehicles. Fund managers, insurance companies and banks holding bonds issued by these vehicles suffered heavy losses when many borrowers could no longer meet their mortgages – because the security comprised of those loans could no longer repay investors.

As with other financial products created at the time, this financing technique was pushed to extremes, including the creation of the infamous Collateralised Debt Obligations (CDOs). These securities suffered compounding losses because they had bundled different series of residential and commercial backed bonds together on the basis they were all different – in theory reducing the risk of them all going bad together. Unfortunately they were not and they did.

In Australia, no “mainstream” residential mortgage or asset backed deal has defaulted. Over the quarter of a century securitisation has been a feature of Australian finance, there have only been a handful of transactions with specific issues. Securitisation has been a valuable tool for the Australian economy and extremely important in facilitating competition in mortgage lending      

There were lessons learned from the crisis but securitisation is still considered important to facilitating economic growth. Regulators are working with bankers, issuers and investors to use securitisation to this end. {For example, the Australian Government is creating the $AU2 billion Australian Business Securitisation Fund to assist small businesses with their funding needs}.

What does it mean for home loan customers?

GM: Across the whole of the Australian loan market, only around 6 in 100 home loans are securitised. Borrowers whose loans have been securitised will not notice anything different. They continue to be a customer of the financial institution where they took out the mortgage.

They still deal directly with their lender, including making all payments to their lender and directing any queries about their mortgage to their lender. Customer service staff do not know if a loan has been securitised, non-securitised loans are treated identically.

Overall, securitisation assists home loan customers by helping smaller lenders access cost and capital efficient funding which they use to compete with major lenders. 

Melissa Currie is Visual Production Editor at ANZ bluenotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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