Aufsätze Ökonomik

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Prof. Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.

Abhandlungen über Johann Heinrich Jung-Stilling

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Securitization structure

A bank and in this context often called originator or originating bank – ties together a large number of credit relationships into a pool (portfolio), – separates the credit risk by means of credit derivatives before passing it on to investors – in larger packages (pools; bundles). Prior to this, – the originating bank transfers the credit risks to an independent special purpose vehicle (SPV, also: conduit). The credit risk of the portfolio is thus separated from the originator. In contrast to true sale securitization, however, there is no direct sale of receivables to the special purpose vehicle; instead, the reference assets remain on the originator bank’s balance sheet. Instead – the investor now acquires credit-linked notes (CLNs) issued by the special purpose entity and thus assumes the credit risks from the reference assets. The special purpose entity invests – the proceeds on the capital market as collateral for the payments to the investor. – The tranches of credit-linked notes issued by the special purpose entity are structured according to the waterfall principle (subordination principle) with regard to the order of loss participation, usually in three tiers: first loss, mezzanine and senior tranche. According to this principle, the respective tranche only participates in the losses from the reference assets when all tranches subordinated to it have been exhausted. As a result of this securitization structure, senior tranches generally achieve a first-class rating. – The outplacing of risks, especially to non-supervised counterparties such as hedge funds around the world, means that it is ultimately no longer known who ultimately holds these risks. Concentration risks may also have arisen among the new risk carriers, as was clearly demonstrated during the subprime crisis and the subsequent financial crisis. This occurs when positions are held that are too one-sided. In the case of Deutsche Industriekreditbank and Sachsen LB, these were ultimately almost exclusively insufficiently collateralized securities from home loans in the USA. An unexpected coincidence of defaults of the reference assets in the respective portfolio then very easily leads to a shock. – See assets, illiquid, buy-and-hold practice, claw-back clause, loan-versus-paper transaction, Diamond thesis, single-originator securitization, defeasance, equity kicker, first-loss tranche, credit derivative, credit extension, credit card fiasco, mezzanine capital, moral hazard, originate-to-distribute strategy, originator, pool, reintermediation, repackaging, repatriation option, setback effect, single master liquidity conduit, tranche thickness, true sale securitization, submarine effect, securitization, securitization, traditional, securitization paper retention, cession. – Cf. Deutsche Bundesbank Monthly Report of April 2004, p. 27 ff., Deutsche Bundesbank Monthly Report of October 2005, p. 87 (issues of subordinated debt by German banks 1990 to 2004), BaFin Annual Report 2013, p. 89 ff. (securitization positions of German banks broken down).

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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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