In the case of securitizations, the fact that risks transferred by banks to special purpose vehicles return to the originator, where they are recognized in the balance sheet and have to be backed by equity. The main reason for this can be that – the originating bank has issued a liquidity guarantee to the special purpose entity close to it; in the event of turbulence on the financial market – as in the case of the subprime crisis in the summer of 2007 – the conduits now find themselves in a liquidity bottleneck, and the bank has to buy assets from the special purpose entity willy-nilly; – a high reputational risk arises for the originator: the buyers of securitized securities felt insufficiently informed about the risk situation. For the bank, it is therefore advisable in the interest of its long-term (noncurrent) business policy to take over the tranches issued by special purpose entities close to it. – In the subprime crisis, this led to considerable tensions on the financial markets worldwide, with the insolvency of individual banks and, as a result, to takeovers and mergers; in Germany, for example, the public-sector Sachsen LB was taken over by Landesbank Baden-Württemberg [LBBW] together with its high-risk and loss-making special purpose vehicles Sachsen Funding, Ormond Quay and Synapse ABS. The central banks, as money lenders of last resort, had to intervene in the market to stabilize it. – In other words, the empirically proven fact that debtors tend to blame their creditors rather than themselves for their predicament. This was very clearly demonstrated on occasion by the Greek crisis. In the minds of the majority of the population, the deadlocked situation was not the result of mismanagement and corruption in their own country. Rather, in the press and on posters at the countless marches and strikes, Germany was portrayed as the cause of all difficulties. The hostile Teutonic barbarians wanted to put the culturally rich people of the Hellenes in a stranglehold: this was not only the opinion of the people on the street. – If the supervisory authorities prohibit banks from certain operations, experience shows that these business areas are served by entities from the shadow banking sector. For this purpose, they borrow from the banks. The risks that the supervisory authorities want to avert from the institutions return to the banking system in this way. – In other words, the loss of trust that a company suffers when it takes decisions and actions that are displeasing in the eyes of the public. For example, Ergo Insurance sent “high-performing employees” on incentive trips to brothels in faraway countries as a reward. This earned the company the popular name “PuffVersicherung.” – See Absence capitalism, Bail-out, Bank regulation paradox, Loans, nonstandard, Europayer, Money market operations, Money lender of last resort, Lemons problem, Mortgage equity withdrawal, Ninja loans, Reputational risk, Risk assumption ground rule, Retransfer clause, Single master liquidity conduit, Subprime lending, Subprime housing finance, Submarine effect, Maturation structure, Asset levy, Lemon trading. – Cf. BaFin Annual Report 2007, p. 124 (merger of Sachsen LB with LBBW; reasons), BaFin Annual Report 2009, p. 29 (no progress no further consolidation at Landesbanken), pp. 135 et seq. (situation of the Landesbanken) as well as the respective BaFin Annual Report, chapter “Supervision of Banks, Financial Service Providers and Payment Institutions.”
Attention: The financial encyclopedia is protected by copyright and may only be used for private purposes without express consent!
University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
https://de.wikipedia.org/wiki/Gerhard_Ernst_Merk
https://www.jung-stilling-gesellschaft.de/merk/
https://www.gerhardmerk.de/