If a borrower can identify, segregate and then satisfactorily describe for investors a pool of securitisable assets otherwise held on its balance sheet, the securitisation process can give that borrower a lower cost of funding and improve its balance sheet management. The borrower faced with such an opportunity who chooses not to securitise runs the risk of handicapping its ability to compete. Securitisation helps banks to improve their return on equity and improve their asset generation by reducing their levels of required reserves without sacrificing income. Reserve requirements imposed by banking regulators can be satisfied by transforming loans and relatively high reserve consumer assets into collateralised obligations requiring a lower reserve. By periodically selling mortgage and consumer originated assets, additional funds are obtained without distorting the acceptable level of gearing.
Liquidity is enhanced, improving the bank's ability to compete for superior performing assets.
Fee income Securitisation translates the bank's multiple functions in a structured financing transaction into multiple and distinct profit centres. Limited recourse fee income is earned for performing primarily the same functions as had previously been performed as the relationship lender. Processes of origination, servicing, collection, credit enhancement, overdraft and liquidity facilities, hazard and obligor performance insurance, currency hedging, interest rate hedging, swap arrangements, trustee services and paying agency services all become sources of limited risk fee income. Our next edition will cover legal considerations in securitisation and structural constraints faced by New Zealand issuers. We will publish it early in July, shortly before running seminars in each office which you would be welcome to attend.