as securities 1 Collateralisation of credit claims A convincing - - PowerPoint PPT Presentation

Collateralising credit claims as securities

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Collateralisation of credit claims

• A convincing business case
• Objectives and features of the project
• Current status of works
• Duplicability of the vehicle

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Collateralisation of credit claims

• A convincing business case
• Objectives and features of the project
• Current status of works
• Duplicability of the vehicle

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A convincing business case

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Increasing needs for collateral… Increasing needs for collateral…

• Bank’s existing marketable collateral is already largely used
• Liquidity is available but does not circulate under uncovered format
• Combined impact on collateral demand of liquidity regulation (LCR) and OTC derivatives

reform (EMIR) up to €4,1 trillion*

• Need to revive the interbank market and decrease central banks intermediation

…calling for an …calling for an optimisation

• ptimisation of collateral usage
• f collateral usage
• Development of triparty management services provide answers
• Collateral must not be captive of a specific context (domestic) or usage (with NCBs only)
• Operational efficiency and interoperability is key for an optimal collateral mobilisation

* BIS (2013), Increased demand for collateral assets : implications for markets and policy, CGFS Papers n° 49.

A convincing business case

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Credit claims: a significant part of banks’ balance sheets… Credit claims: a significant part of banks’ balance sheets…

• Stable funding source for the euro area economy* : NFCs rely on bank loans for 40% of

their financing needs in the euro area (for less than 10% in the US)

• Especially for SMEs as 25% of MFI loans smaller than €250,000
• Share of MFI lending to NFCs in total MFI assets in FR and DE : 10% ; IT and ES : 20%

… but remain an underused source of collateral … but remain an underused source of collateral

• Use of credit claims as collateral essentially with central banks and on a domestic
• Close to nil on cross-border basis and interbank market
• Underused source of collateral due to legal impediments and operational constraints

*ECB(2013), The use of credit claims as collateral for Eurosystem credit operations, Occasional Papers n° 148.

A convincing business case

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The market calls for the The market calls for the securitisation securitisation of credit claims

• f credit claims
• Clear and unambiguous market support
• Strong commitment from the sponsor banks
• Strong support from international banks
• Interest from European market associations
• Clear interest expressed by investors

In line with In line with several public policy several public policy objectives

• bjectives
• The securitization of credit claims will contribute to
• finance the real economic sphere, especially SMEs
• increase the available amount collateral on the interbank market
• revive the interbank market / decrease dependency on central banks
• reduce dependency towards rating agencies

Collateralisation of credit claims

• A convincing business case
• Objectives and features of the project
• Current status of works
• Duplicability of the vehicle

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Objectives and features

A simple and transparent instrument

Objectives and features

Detailed collateralisation process used in France

€

Investor

€ Securities

Sponsor bank Borrower (SME)

€

Collateralized loan €

Intermediary Bank (used to

transfer the collateralized loan) Pledge (Financial Guarantee L211-38)

1 2 3 4

Underlying CC Assignment of loan receivables & transfer of the Financial Guarantee L214-43 Collatera lized loan Securities

SPV

Compartment bank x Compartment bank y Compartment sponsor bank

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A subsidiary (from the same group as the sponsor bank) grants a loan – the underlying CC - to a borrower (corporate).

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Underlying CC are assigned to an intermediary bank as security interest by the sponsor bank as a guarantee to a collateralized loan provided by this intermediary bank to the originator according to the L211-38 article

• f the French Code Monétaire et Financier. In

exchange, the sponsor bank receives cash.

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The collateralized loan is sold by the intermediary bank to the SPV’s relevant compartment and the underlying CC are assigned as security interest to this SPV’s relevant compartment at the same time. In exchange, the intermediate bank receives cash. After selling the loan, the intermediary bank is no longer involvedin the transaction.

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The sponsor bank compartment in the SPV issues securities backed by the collateralized loan and receives cash in exchange.

Credit claims (CC) mobilisation technique using the Collateral Directive (transposed in France via the Financial Guarantee - article L211-38 of the French Monetary and Financial Code)

Objectives and features

French project features

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• Common issuance structure and documentation for all sponsor banks
• Each bank has its own compartment(s)
• Mutualized setting-up costs

Simple set Simple set- up up

• Very transparent structure
• Eligible credit claims only, assessed via NCB ICAS or banks IRB
• Asset manager and depository, compliant with securities regulation
• Full segregation of risks among sponsor banks
• Double-recourse for bond holders

Risk control Risk control measures measures

• Alignment of security characteristics with those of the underlying collateral
• Dynamic portfolio of credit claims modifiable twice a week to allow short

term loans and cope with prepayment risk

• Issuance parameters under control of each sponsor bank

Flexibility Flexibility and and efficiency efficiency

Objectives and features

French project features

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Based on a very transparent and simple (no tranching) structure

 Robust and risk-adverse

Replicable in different jurisdictions  Designed to embed risk management measures  Cost-efficiency and scalability

Collateralisation of credit claims

• A convincing business case
• Objectives and features of the project
• Current status of works
• Duplicability of the vehicle

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Current status of works

Project calendar

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From From concept concept

2012 - Initiative from High Level Market Place Committee Q1-Q2/2013 – Feasibility study groups June 2013 – Finalisation of the project blueprint

To reality To reality To reality To reality

• Q3/2013 - Project launched by six major international banks
• Oct.2013 - Selection of the providers – pre-operational phase

Currently Currently Currently Currently

Q1/2014

• Set up fo the structure
• First securities issuances

Current status of works

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Market Place project and eligibility assessment in parallel

Market Place project

• Banking community’s clear commitment and

supportive role of Banque de France

• Project is now in its pre-operational phase
• Structure to be set up by Q1/2014 for the

first issuance

Eligibility assessment

• Banks’ requests for eligibility of the

securities as collateral

• Eurosystem’s analysis

Collateralisation of credit claims

• A convincing business case
• Objectives and features of the project
• Current status of works
• Duplicability of the vehicle

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Duplicability across Europe

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The business case goes beyond French borders The business case goes beyond French borders

• Increasing collateral needs of the overall banking community
• The initiative relies on a common Eurosystem collateral class (credit claims)
• Securitisation can be very instrumental in jurisdictions where credit claims mobilisationis

facing operational constraints

Market support is international Market support is international

• Interest from European market associations (ECBC, ERC)
• Support from international banks and collateral management services providers
• Interest from international investors

Duplication in Duplication in different different jurisdictions jurisdictions

• Lies on common legal basis stemming from European Directives, subject to local adaptations
• Facilitatedby a very simple and transparent structure
• Can capitalise on existing or future facilitiesand infrastructures

Conclusion

• Project featured by

 an obvious market need  a clear market support  positive externalities

• The business case goes across borders
• Current request for collateral eligibility

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