ECON2200 Tutorial 10 Securitization (1)()-Word ( ? ECON2200 TUTORIAL SECURITIZATION Recall that loans have a regulatory risk weight of 100%. Imagine the Clever Bank has $100m loans, which it could sell to its own SPV Quick Money. Quick Money can structure the cash fows from the S100m loans to create the following tranches: e) QUESTION: TRANCHES t in million for CAR (APRA APS whole tranche bank buying the Assume that $100 million face value of MBS were used to create the following tranches issued by Quick Money SP 30 Amount in million | Allocation in % | Risk weights for CAR Aat APRA APS 120 $ 30 20% $5 20% Aa1 A2 Baa1 $5 A1 A2 100% 100% Baa3 Ba1 Total Baa1 100% 100 100 350% 350% Comment if it is worth for Clever Bank to sell its loans to Quick Money and then buy all tranches that Quick Money created. Ba1 a) BIG Bank invested in the Quick Money Aaa and Ba1 tranch (see balance sheet, Calculate its risk weighted assets and evaluate if its capital buffer was consistent with a 10 percent minimum capital adequacy ratio at the time of the initial purchase. iabilities and equity $90 10Demand deposits Quick Money Aaa tranche Quick Money Ba1 tranche Loans (risk weight 100% $15 Equity S5 570 $10 b) Show the changes in Small Banks' balance sheet once 15 percent of the Quick Money loan pool is written off. Check the impact upon the tranches and explain what problem Small Bank faces. c) Assume Big Bank would have invested $20 directly in subprime mortgage instead of the tranches. Explain if this would have been better or worse for Big Bank d) Big Bank gets an offer to swap all its loans against Quick Money A3 tranches one dollar for one dollar. Explain why this might be an attractive offer from a Capital Management point of view. 1,2 386 +80% 16:50 ECON2200 Tutorial 10 Securitization (1)()-Word ( ? ECON2200 TUTORIAL SECURITIZATION Recall that loans have a regulatory risk weight of 100%. Imagine the Clever Bank has $100m loans, which it could sell to its own SPV Quick Money. Quick Money can structure the cash fows from the S100m loans to create the following tranches: e) QUESTION: TRANCHES t in million for CAR (APRA APS whole tranche bank buying the Assume that $100 million face value of MBS were used to create the following tranches issued by Quick Money SP 30 Amount in million | Allocation in % | Risk weights for CAR Aat APRA APS 120 $ 30 20% $5 20% Aa1 A2 Baa1 $5 A1 A2 100% 100% Baa3 Ba1 Total Baa1 100% 100 100 350% 350% Comment if it is worth for Clever Bank to sell its loans to Quick Money and then buy all tranches that Quick Money created. Ba1 a) BIG Bank invested in the Quick Money Aaa and Ba1 tranch (see balance sheet, Calculate its risk weighted assets and evaluate if its capital buffer was consistent with a 10 percent minimum capital adequacy ratio at the time of the initial purchase. iabilities and equity $90 10Demand deposits Quick Money Aaa tranche Quick Money Ba1 tranche Loans (risk weight 100% $15 Equity S5 570 $10 b) Show the changes in Small Banks' balance sheet once 15 percent of the Quick Money loan pool is written off. Check the impact upon the tranches and explain what problem Small Bank faces. c) Assume Big Bank would have invested $20 directly in subprime mortgage instead of the tranches. Explain if this would have been better or worse for Big Bank d) Big Bank gets an offer to swap all its loans against Quick Money A3 tranches one dollar for one dollar. Explain why this might be an attractive offer from a Capital Management point of view. 1,2 386 +80% 16:50