Asset-Liability Management

Securitization Food Chain is the chain of loan payments for mortgage loans. The chain started with home buyers taking out a mortgage loan from lenders. After home buyers would take out a loan the lenders would then sell the mortgage to investment banks. The investment banks combined thousands such as car loans, student loans, credit card debt, and ect. The combination of all the loans was called Collateralized Debt Obligation. Investment banks take the Collateralized Debt Obligation and sell them to investors often misleading the investors to believe the investments where low risk. Risky investments were then made with the depositors money. They did not care about the quality of the mortgage, only maximizing their volume and getting a fee out of

In 2008, one of the worst financial crises since the Great Depression occurred. The severity of this collapse cannot be understated as demonstrated by the bankruptcy of Lehman Brothers, the fourth largest investment bank in the US, and with many other financial institutions such as Merrill Lynch and the Royal Bank of Scotland having to be bailed out. In addition, the Global Banking System was within a whisker of collapsing and if it where not for the trillions of dollars invested in the system by national banks then this banking collapse would have lead to economic catastrophe. Therefore, in order to avoid such a calamity from occurring again, it is important to ask the question why did this financial recession occur and what factors contributed towards this downfall? Although there are many reasons as to why this recession occurred it could be argued that securitized lending and shadow banking played the largest role in this economic crisis. It is therefore important to understand what securitized lending and shadow banking means. Securitized lending is the process by which a financial institution such as a bank pools illiquid assets, such as residential and commercial mortgages and auto loans (by which the bank receives from the public through house mortgages and loans), and loans these newly formed short-term bonds to third party investors in exchange for cash or collateral. Since its creation in the 18th century, securitized lending was increasingly popular and very much

Mortgage-backed securities were bonds that were secured by home and other real estate loans. They were created when a number of these loans, usually with similar characteristics, were pooled together. As part of the housing and credit booms, the amount of financial agreements called mortgage-backed securities, which derive their value from mortgage payments and housing prices, greatly increased (Subprime mortgage crisis). Pools of loans were sold to federal government agencies like Ginnie Mae or a government sponsored-enterprise such as Fannie Mae or Freddie Mac. Securitization was the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security. A typical example of securitization

At the same time, the rise in the demand for securitized products changed the function of the banks; their key activity became to originate loans, package them, and sell them to investors. As a result, lending standards fell dramatically and banks relaxed regulatory standards, which increased loan approvals. Also, mortgage brokers began providing discounted mortgages, no-documentation mortgages and NINJA (No income, No job, No assets) loans. The background checking became unnecessary because the price of the houses were just increasing, and the originating banks were able to pass the loans to less risk-averse investors (E,Benemlelich. J,Dlugosz.2008).

An originate-to-distribute model of lending, where the originator of a loan sells it to various third parties, was a popular method of mortgage lending before the onset of the subprime mortgage crisis. This originate to distribute model had advantages over the old originate to hold model, where a bank originated a loan to the borrower and retained the credit risk. People believe that originate to distribute model of banking played a key role in the development of the financial crisis because instead of holding loans on banks’ balance sheets, banks moved to an “originate and distribute” model. Banks repackaged loans and passed them on to various other financial investors, thereby off-loading risk. Next, banks increasingly financed their asset holdings with shorter maturity instruments. This change left banks particularly exposed to a dry-up in funding liquidity.

When something collapses, there are always some things to blame on; and for the financial crisis erupted August 2007, people blamed it on off-balance sheet financing vehicles. Special purpose entities (SPEs), structured investment vehicles (SIVs), or variable interest entities (VIE) are different terms used for “off-balance sheet financing” practices that banks had used to hide their debts until the recent market meltdown. This paper will briefly discuss the genuine problem causing the collapse in financial system, what actions have been taken by the policy makers, and whether or not those actions will work.

Financial transactions are very common in today’s world. In these types of transactions, security must be created. These creations of securities are known as securitization. Security is a financial claim which is exhibited by document. The main feature of securitization is marketability. Henceforth, securitization is creation of marketable and tradable securities which is hinged on the inflows and outflows (cash flows) of the assets and liabilities of an individual. Cash flows refer to those generated in the asset side of the balance sheet mainly receivables; cash in bank and hand, plant and machinery. The Special Purpose Vehicle (SPV) uses these cash flows to issue marketable securities to investors so that funds for the payment to the asset originator can be arranged. Securitization is an innovation in the financial markets. For innovative financing sources, exceeding individual’s cash flow status, acquiring better liquidity position and issuing new securities to new individuals or group of investors, these innovative financing sources have become a necessity. For mortgage financing in secondary markets, securitized instruments are also essential. An asset is eliminated from the balance sheet when it is securitized.

Liquidity for a bank means the ability to meet its financial obligations as they become due. Liquidity at a bank is a measure of its ability to readily find the cash it may need to meet demands upon it. Liquidity can come from direct cash holdings in currency or on account at the Federal Reserve or other central bank. More commonly it comes from holding securities that can be sold quickly with minimal loss.. Thus one of the main challenges to a bank is ensuring its own liquidity under all reasonable conditions and its one the commercial banking principle also “Principle of Liquidity”.

By achieving “bankruptcy remoteness”, firms commit to more efficient investment decisions in bankruptcy (Ayotte & Gaon, 2010). In addition, this practice together with other credit enhancement mechanisms, generally allow the new securities issued to obtain higher ratings from credit agencies – including risk free levels. A number of studies have concluded that securitization has various positive implications. For instance, some empirical studies show that securitization creates value by increasing liquidity, reducing credit and improving leverage ratios (Amrose, Lacour-Little, & Sanders, 2005). According to Riddiough (2011), and it can alleviate market failure, and increase competition and borrower choice. In their study, Altunbas et al (2009) show how banks’ capacity to supply new loans has been strengthened by the securitization activity. In addition, another advantage of securing assets is that funding costs can be reduced because the securities issued can match better the risk return preferences of investors (Aiyar et al,

Structured products are blamed for playing important role in the 2007 crisis. The securitisation process changed the way banks operate as the originate-to-hold model replaced by the fee driven originate-to-distribute model. New operating model helped banks reduce maturity mismatch for assets and liabilities. However, such products are not transparent

Assets and Liabilities management (ALM) is a hybrid management system includes both Assets management and Liabilities management. By studying both aspects of Assets Management and Liabilities Management we can conclude that Assets and Liabilities management (ALM) aim to maintain a healthy spread between assets and liabilities to increase profit and manage risks in better way. In other words, we can say that ALM is a technique which bank employ for making coordination between the assets and liabilities in order to earn profit. 8

institutions to bring their off-balance sheet liabilities and assets on-balance to ensure banks have a

Back in 2007 when the financial crisis hit, many banks were faced with liquidity crisis. This was because they had no short term assets i.e. cash. Only long term assets were available such as loans. This meant that if a bank had loaned £500,000 as a mortgage backed security to a homeowner, the bank was unable to ask for that money back until the maturity date which tends to be very long. Liquidity crisis became very apparent in 2007 and as prior to 2007 banks saw short term lending less profitable and long term lending such as mortgages highly profitable. And when the financial crisis hit money markets absorbed up and many banks did not have access to sufficient cash which had a huge effect on consumers causing a panic and a ‘run on the banks,’ this gave consumers the understanding that banks were unable to meets it financial commitments. As this happened, around the world central banks were injecting short term liquidity into banks hoping faith and confidence is restored within the banking industry.

1.0 INTRODUCTION Asset management is a concept that companies use to ascertain the value of their assets. It provides a quick measure of the worthiness of the organization and so becomes easier for organizations to prepare their final accounts as they are able to quickly estimate the value of their assets. Well managed organizations are required to perform regular fixed asset audits. Tracking and managing corporate assets and equipment is a challenge to most organizations especially when there is a large volume of assets or when those assets move frequently between departments or multiple branches. However in today‟s regulatory environment, it has become more important than ever for companies to

The main aim of this report is to identify the key roles played by bank capital in the banking business. This report briefly outlines the main functions of bank capital and takes a brief look at the benefits of bank capital to the bank and the banking industry. It is hoped that from reading this paper a general understanding of the roles of bank capital in the banking business can be gained.