A bank grants a customer a facility that the customer can dispose of unconditionally at any time. – Such a commitment by the bank has the effect of enhancing creditworthiness (enhancement of soundness) and is similar to a guarantee. – In the course of the subprime crisis, many special-purpose entities had to draw on the facilities granted to them by the originator, i.e. draw down the loan amount in full, in order to be able to continue servicing the securitized securities issued or to remain solvent vis-à-vis lending third parties. This brought some of the originating banks to the brink of insolvency. – Strangely enough, however, such loan commitments with a guarantee ranking (according to IAS 37.23) only had to be recognized as provisions in the balance sheet if there was an overwhelming probability that they would be utilized. However, because until the subprime crisis the facilities of the originator were hardly drawn by the special purpose entity, the loan commitments disappeared into the so-called “balance sheet void” (were not reported on the balance sheet): they were merely recorded in incidental disclosures in the notes or in the management report. – By its nature, an irrevocable loan commitment is clearly a financial instrument (contract that gives rise to a financial asset for one party and a financial liability for the other party). – See off-balance-sheet transaction, guarantee, back-to-originator postulate, credit enhancement, surety, credit enhancement, guarantee, guarantee transaction, credit quality, letter of comfort,
Retransfer clause, repayment, early, support, implied, securitization securities retention, special purpose entity consolidation.
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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