COMMERCIAL BANK MANAGEMENT

1
COMMERCIAL BANK MANAGEMENT

• TASTAN ALTUNER
• GENERAL MANAGER
• ASBANK LIMITED
• taltuner_at_hotmail.com

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SECURITIZATION

• THE POOLING OF ASSETS (LOANS) INTO A SPECIAL
  PURPOSE ENTITY (SPE) AND THE SELLING OF
  SECURITIES AGAINST THESE ASSETS IN THE MONEY
  MARKETS IS REFERRED TO AS SECURITIZATION

3
THE PROCESS OF SECURITIZATION

• 1. LOANS GRANTED BY A BANK (ORIGINATOR) ARE
  POOLED
• 2. THIS POOL OF LOANS IS SOLD TO A SPECIAL
  PURPOSE ENTITY (SPE) ALSO CALLED THE ISSUER, THE
  SPE IS COMPLETELY SEPARATE FROM THE ORIGINATOR.
• 3. A TRUSTEE IS APPOINTED TO ENSURE THAT THE
  ISSUER FULFILLS ALL THE REQUIREMENTS OF THE
  TRANSFER OF LOANS TO THE POOL, PROVIDES
  GUARANTEES AND CHECKS COLLATERAL REQUIREMENTS.
• 4. THE SPE SELLS SECURITIES ON THE MONEY MARKET
  BACKED BY THE POOL OF LOANS.
• 5. THE TRUSTEE COLLECTS AND DISBURSES TO
  INVESTORS ALL CASH FLOWS GENERATED BY THE POOLED
  LOANS, TEMPORARILY INVESTING CASH GENERATED BY
  THE LOANS UNTIL THE INVESTOR PAYMENT DATE.
• 6. ANOTHER BANK OR INSURANCE COMPANY MAY BE
  CONTRACTED TO PROVIDE CREDIT GUARANTEES
  (ENHANCEMENTS) AND LIQUIDITY GUARANTEES
  (ENHANCEMENTS).

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THE ADVANTAGES OF SECURITIZATION FOR A BANK

• THE BANK CONTINUES TO SERVICE THE LOANS PLEDGED,
  THEREBY IT RETAINS THE CUSTOMER GRANTED THE LOAN,
  BUT THE LOAN ITSELF IS REMOVED FROM THE BANKS
  ASSETS, ELIMINATING THE RISK OF LOSS IF THE
  BORROWER DEFAULTS, OR IF INTEREST RATE MOVEMENTS
  LOWER THE VALUE OF THE LOAN.
• BECAUSE THE LOAN IS REMOVED FROM THE BANKS
  BALANCE SHEET THE CAPITAL REQUIRED AGAINST THESE
  LOANS IS FREED, (BANKS MUST MAINTAIN A CAPITAL TO
  RISK WEIGHTED ASSETS RATIO OF NOT LESS THAN 8).
• IT CREATES LIQUID ASSETS OUT OF RELATIVELY
  ILLIQUID, EXPENSIVE-TO-SELL ASSETS.
• FEE INCOME IS GENERATED BY CONTINUING TO SERVICE
  THE LOAN.
• FEE INCOME MAY BE GENERATED BY SELLING GUARANTEES
  (CREDIT ENHANCEMENTS) AND BY PROVIDING LIQUIDITY
  (LIQUIDITY ENHANCEMENTS).

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COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs)

• MORTGAGE LOANS OR LOAN-BACKED SECURITIES ARE
  POOLED AS A COLLATERAL BASE FOR THE ISSUANCE OF
  MORTGAGE-BACKED SECURITIES.
• EXPECTED CASH FLOWS ARE GENERATED FROM THE LOANS
  TO REPAY BUYERS OF THE SECURITIES THEIR PROMISED
  INTEREST AND PRINCIPAL PAYMENTS.
• ANY LOANS THAT ARE REPAID EARLY GENERATE A CASH
  FLOW THAT GOES TO RETIRE DIFFERENT MATURITIES OF
  SECURITIES, STARTING WITH THE SHORTEST MATURITIES
  FIRST.
• CMO INVESTOR GROUPS GET PREPAID LOAN CASH
  STARTING WITH TRANCHE A (SHORTEST MATURITY)
  INVESTORS, THEN TRANCHE B, DOWN TO TRANCHE Z
  (LONGEST MATURITY).

6
SALES OF LOANS

• IN ADDITION TO USING LOANS AS COLLATERAL TO ISSUE
  SECURITIES BANKS MAY SELL LOANS IN THEIR ENTIRETY
  TO A NEW OWNER.
• LOAN SALES HAVE CREATED A MULTI-BILLION DOLLAR
  MARKET.
• MOST LOANS ARE PURCHASED IN MILLION-DOLLAR UNITS.
• USUALLY THE SELLER RETAINS THE SERVICING RIGHTS
  OF THE LOAN, GENERATING FEE INCOME.

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SALES OF LOANS

• REASONS BEHIND LOAN SALES
• 1. SELLING LOANS AND REPLACING THEM WITH
  GOVERNMENT SECURITIES INCREASES THE LIQUIDITY OF
  THE BANK
• 2. REMOVES BOTH CREDIT AND INTEREST RATE RISK
  FROM THE BANK
• 3. GENERATES FEE INCOME FOR THE BANK.

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THE RISKS IN LOANS SALES

• THE BEST QUALITY LOANS ARE THE MOST SALABLE, THE
  BANK MAY FIND THAT THE LOANS LEFT IN ITS
  PORTFOLIO ARE THE POOR QUALITY LOANS.
• SOMETIMES THE SELLER AGREES TO GIVE THE LOAN
  PURCHASER RECOURSE TO THE SELLER FOR ALL OR A
  PORTION OF THE LOANS THAT BECOME DELINQUENT,
  THEREBY SHARING THE CREDIT RISK.
• EVEN THOUGH RECOURSE AGREEMENTS ARE NOT COMMON IN
  TODAYS LOAN MARKET, MANY BANKS FEEL OBLIGATED TO
  TAKE BACK TROUBLED LOANS THAT THEY SOLD TO A
  CUSTOMER.

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STANDBY LETTERS OF CREDIT

• STANDBY LETTERS OF CREDIT INVOLVE THREE PARTIES
• THE ISSUER, USUALLY A BANK OR INSURANCE COMPANY.
• AN APPLICANT (ACCOUNT PARTY) FOR WHOM THE LETTER
  IS ISSUED.
• THE BENEFICIARY, WHO CAN CALL UPON THE ISSUER FOR
  REIMBURSEMENT IN THE CASE THAT THE APPLICANT DOES
  NOT FULFILL THEIR OBLIGATIONS TO THE BENEFICIARY.

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STANDBY LETTERS OF CREDIT

• STANDBY LETTERS OF CREDIT CAN BE CLASSED INTO TWO
  CATEGORIES
• PERFORMANCE GUARANTEES, IN WHICH THE ISSUER
  GUARANTEES THAT THE APPLICANT WILL FULFILL A
  SPECIFIED ACTION DURING A SPECIFIED TIME, FOR
  EXAMPLE THE CONSTRUCTION OF A BUILDING.
• DEFAULT GUARANTEES, UNDER WHICH THE ISSUER
  PLEDGES THE REPAYMENT OF A CREDIT GRANTED TO THE
  APPLICANT BY THE BENEFICIARY.

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STANDBY LETTERS OF CREDIT

• STANDBY LETTERS OF CREDIT (SLCs) ARE CONTINGENT
  LIABILITIES FOR THE ISSUER, AND ARE REPORTED AS
  OFF-BALANCE SHEET ITEMS, THE KEY ADVANTAGES OF
  ISSUING THEM ARE
• FEE INCOME, GENERALLY 0.5 TO 1
• HELPING CUSTOMERS BORROW MORE CHEAPLY
• BECAUSE THE BANK IS AWARE OF THE FINANCIAL
  CONDITION OF ITS CUSTOMERS SLCs CAN BE ISSUED AT
  RELATIVELY LOW COST
• THE PROBABILITY THAT THE BANK WILL BE CALLED UPON
  TO REIMBURSE THE BENEFICIARY IS LOW.

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STANDBY LETTERS OF CREDIT

• STANDBY LETTERS OF CREDIT (SLCs) ARE SUBJECT TO
  REGULATORY CONTROL BY BANK SUPERVISORS, RULES
  INCLUDE
• BANKS MUST APPLY THE SAME CREDIT STANDARDS FOR
  APPROVING SLCs AS THEY DO FOR APPROVING DIRECT
  LOANS
• BANKS MUST COUNT SLCs AS LOANS WHEN ASSESSING
  RISK-EXPOSURE TO A CUSTOMER
• BANKS ARE REQUIRED TO SET ASIDE CAPITAL TO
  SUPPORT SLCs AS THOUGH THESE CONTINGENT
  LIABILITIES WERE LOANS.