《商业银行管理》课后习题答案IMChap10

CHAPTER 10

OFF-BALANCE-SHEET FINANCING IN BANKING AND CREDIT DERIVATIVES

Goal of This Chapter: To learn about some of the newer financial instruments that banks have used in recent years to help reduce the risk exposure of their bank, and in some cases, to aid in generating new sources of fee income and in raising new funds to make loans and investments.

Key Terms Presented in This Chapter

Securitization Contingent obligation

Credit Enhancement Issuer

Loan Sales Account party

Servicing Rights Beneficiary

Participation Loans Credit derivatives

Assignments Credit swap

Loan strip Credit option

Financial guarantees Credit default swap

Standby letter of credit (SLC)

Chapter Outline

I. Introduction: Sources of Funds Shortages and Credit Risk for Banks

II. Securitizing Bank Loans and Other Assets

A. Nature of Securitization

B. Advantages of Securitization

C. The Rate Structure of Securitization

D. Beginnings of Securitization – The Home Mortgage Market

1. Collateralized Mortgage Obligations – CMOs

2. Securitization of Home Equity Loans

E. Examples of Other Assets That Have Been Securitized

F. Subordinated Securitizations

G. Trends in Securitizations Today

H. Impact of Securitization on Banks

Ill. Sales of Loans to Raise Funds

A. Nature of Loan Sales

B. Loan Participations and Loan Strips

C. Reasons Behind Loan Sales

D. The Risks in Loan Sales

IV. Standby Credit Letters

A. The Nature of Standby Credits (Contingent Obligations)

B. Types of Standby Credit Letters

C. Advantages of Standbys

D. The Structure of Standby Letters of Credit

E. The Value and Pricing of Standby Letters

F. Sources of Risk with Standby Credits

G. Regulatory Concerns about Standby Credit Arrangements

H. Research Studies of Standbys and Other Contingent Obligations

V. Credit Derivatives

A. An Alternative to Securitization

B. Credit Swaps

C. Credit Options

D. Credit Default Swaps

E. Credit Linked Notes

F. Risks Associated With Credit Derivatives

VI. Summary of the Chapter

Concept Checks

10-1. What does securitization of assets mean?

Securitization involves the pooling of groups of earning assets, removing those pooled assets from the bank’s balance sheet, and issuing securities against the pool. As the pooled assets generate interest income and repayments of principal the cash generated by the pooled earning assets flows through to investors who purchased those securities.

10-2. What kinds of assets are most amenable to the securitization process?

The best types of assets to pool are high quality, fairly uniform loans, such as home mortgages or credit card receivables.

10-3. What advantages does securitization offer for banks?

Securitization gives banks the opportunity to use their assets as sources of funds and, in particular, to remove lower-yielding assets from the balance sheet to be replaced with higher-yielding assets. 10-4. What risks of securitization should bank managers be aware of?

Banks often have to use the highest-quality assets in the securitization process which means the remainder of the portfolio may become more risky, on average, increasing the bank’s capital requirements.

10-5. Suppose a bank securitizes a package of its loans that bear an expected gross annual interest yield of 13 percent. The securities issued against the loan package promise interested investors an annualized yield of 8.25 percent. The expected default rate on the packaged loans is 3.5 percent. The bank agrees to pay an annual fee of 0.35percent to a security dealer in order to cover the cost of underwriting and advisory services and a fee of 0.25 percent to Arunson Mortgage Servicing Corporation to process the payments generated by the packaged loans. If the above items represent all the costs associated with this securitization transaction can you calculate the percentage amount of residual income the bank expects to earn from this particular transaction?

The bank’s estimated residual income should be about: