1、The role of structured finance in the overall funding strategy of the CEE banks. The case of Asset Securitisation Kazimierz Michal KELLES-KRAUZ Vienna University of Economics and Business Administration Since the political changes in Eastern Europe took place, banks in this region have experienced
2、a significant reorganization in structure, core activities and business understanding. These changes have led to the development of banking entities which are flexible, open to the new banking perspectives and react promptly to market changes. However, extensively growing Central and Eastern Europea
3、n (“CEE”) markets require financial sources to meet the increasing demand for core banking intermediation. In order to maintain future growth banks will search for funding instruments which allow them to grow without having a balance sheet effect. In this respect structured finance (especially asset
4、 securitisation) may be a solution for these banks and also for other institutions looking for diversified funding sources or credit risk mitigants. It is expected that trend to use securitisation structures will gain on importance due to the decrease in the availability of core funding instrument w
5、hich are currently deposits. CEE banks customers are becoming more aware of possibilities on how to allocate their capital efficiently therefore conventional banking and battle for traditional funding sources will become more expensive. Although, recent market turbulences have significantly reduced
6、the demand for structured finance products in developed economies, the role of these instruments will not lose on importance in the future. The growing sophistication of CEE banking industry will force banks to create products which enable them to attract liquidity by more advanced means. Covered bo
7、nds, ECB repurchase agreements and privately placed securitisation transactions can give flexibility towards active balance sheet management in the times of significant liquidity problems. The development organisations like KfW, EBRD, IFC or FMO due to their statutory responsibilities can serve as i
8、ntermediaries and “market maker” investors. Keywords: Structured Finance, Asset Securitisation JEL codes : G21, O16 931 Structured finance According to Andreas A. Jobst definition: ”all private and public financial arrangements that serve to efficiently refinance and hedge any profitable economic ac
9、tivity beyond the scope of conventional forms of on balance sheet securities (debt, bonds, equity) in the effort to lower cost of capital and to mitigate agency costs of market impediments on liquidity are covered by Structured Finance”. The transactions by means of changing the traditional method o
10、f financing (lending and deposits), reducing the risk weighted and due to the accounting issues are part of structured finance and are gaining a significant importance in the European market. The asset securitisation belongs to the group of structured finance transactions and gives an answer for ban
11、ks, companies or public sector entities facing the liquidity problems especially in emerging markets. In its scope asset securitisation repackages the originated banking receivables and transfers them to the special purpose vehicle (“SPV”) which is finally refinanced by the issuance of bond obligati
12、ons with different risk categories. The notes issued are “backed” by the underlying assets and all the profits resulted under the transferred claims are after the assignment date the rights of SPV. The originating bank (“Originator”) have the right to the residual profit (“Excess Spread”) which is t
13、he remaining amount after paying the coupon on the notes and other senior expenses. Andreas Jobst in his working paper “Sovereign Securitisation in Emerging Markets” sees the following benefits of securitisation for the originating organisations: square4 Better asset liability management (the issues
14、 of ABS enables to fund new assets) square4 Market based valuation of assets square4 For emerging issuers securitisation of future flow receivables gives the possibility of entering into a new international market . Hence, the transformation and fragmentation of asset exposures during the generation
15、 of securitised cash flows characterizes the valuable method of splitting the risks associated with the assets to a broader investors range and capital markets . Naturally the growth in assets requires additional equity. This makes the conventional funding a relatively expensive alternative, whilst
16、the securitisation in its structure enables to diversify the funding sources, reduce the equity involved in the transaction and gives the possibility to increase the business at competitive margins. 942 Banking assets growth in Eastern Europe The stronger growth of assets in CEE countries is still s
17、ubject to the economic reforms and determined by the size, maturity and potential of each country 14, p.12. These three factors should be analyzed taking into consideration the degree of banking intermediation which translates into the ratio between the total assets of the banking sector and GDP at
18、current prices 14, p.12. It represents a more significant number for markets with a higher degree of maturity and economies which have a considerable degree of influence of financial institutions. During the last years the banking assets to GDP ratio has increased in CEE significantly. Below graph d
19、epicts the upward trend which gives an indication for liquidity needs of CEE banks in order to fund the future asset growth. 0%20%40%60%80%100%120%140%1999 2000 2001 2002 2003 2004 2005 2006 2007Bosnia andHerzegovinaBelarusAlbaniaCroatiaSloveniaBulgariaSlovakiaHungaryCzech RepublicRomaniaPolandUkrai
20、neRussiaFigure 1 Total banking assets in % of GDP in Eastern Europe source: own analysis Taking into consideration the time in which the Eastern countries developed their banking structure and adapted to the new market circumstances and regulations implies the existence of strong competition between
21、 those banks and markets. This competition will drive them to seek for the innovative funding methods in order to maintain the current position or to achieve the sustainable market presence. 952.1 Structured finance in developed markets why CEE now? As a funding instrument structured finance (e.g. A
22、sset Securitisation) exists in developed countries for more than thirty years. The origin and reason for its growth was connected with increasing demand for loan products, especially mortgage and housing, in United States where bankers firstly recognized the threat of illiquidity 10, p.31. The loan
23、originating process was therefore constrained by the availability of funds. This trend was later supported by transformation of commercial banking into more investment banking related activities 5, p.111. Based on that reason and also on the competition among originators in reaching the customers, b
24、anks acquired the ability of selling the part of their loan portfolio to external investors 5, p.111. By that means, apart from the traditional origination, banks started to be involved also on the investor side depending on their origination and underwriting capabilities. Furthermore, financial int
25、ermediation of CEE banks still differ from the EU banking levels, although the banks ability to collect deposits have improved over the last decade 8, p.26. However, comparing to the EU benchmarks, the development of lending in CEE is limited by the less developed capital markets in these countries,
26、 what has a negative effect on the traditional banking intermediation 8, p.26. Hence, CEE banks in order to maintain the intermediation are forced to seek for funding in more developed capital markets or use credit facilities made available by their parent companies. Finally, main factors that make
27、structured finance asset securitizations especially attractive for CEE banks compared to banks from more developed countries are as follows: 1. Origination a. Very dynamic growth of assets in CEE region b. Limited possibility to fund the growing origination with on balance methods especially for ass
28、et with long maturity e.g. mortgage loans 2. Liquidity a. Capital market of CEE highly dependent on Western investors, b. Deposits become limited funding source and in some cases represent very expensive one1 c. Funding can only be made available through global capital markets. Local market is not s
29、ufficient for the growing origination needs 1 For instance, average deposit account in Ukraine pays interest in range from 12% to 16% per annum. 963. Economics a. Securitisation transactions provide more attractive yields to the investors than “western” deals2 b. Asset securitizations open a possibi
30、lity for arrangers and investors to widen their customer base and to enter into new markets what can be beneficial for their future banking activities c. CEE/CIS banks are looking forward for competitive funding; securitization pricing wise may provide funding on attractive spreads, d. Regulatory is
31、sues after Basel 2 implementation give more incentive for CEE banks to securitize certain portion of their assets, e. Mathematically, CEE banks through still higher loan margins contribute to the higher ROE ratios for the part of their portfolios which have been securitized. 4. Innovation a. Asset S
32、ecuritizations contribute to know-how transfer from arranging to the originating bank, highly beneficial for CEE banks. b. For the purpose of the transaction CEE banks apply their Risk Management, Collections, Origination and Underwriting criteria to the western standards in order to comply with the
33、 norms required by the rating agencies, 5. Reputation a. Due to involvement in asset sales deals, CEE banks build their reputation and brand recognition also abroad, b. Brand and marketing reasons for all parties involved 6. Structure a. There is demand for sophisticated products from the CEE banks.
34、 b. Reorganization of banking structures in CEE using the “western” models and implementation of solutions already applied by the more developed banks Asset origination in CEE/CIS represents rapid growing characteristics and is not limited to the one asset class only but is represented in overall gr
35、owing of CEE economy. 2 due to “first time issuer” premium that CEE banks have to pay 973 The changes in banks funding strategies in Central and Eastern Europe The quick development of the Central Eastern European banking system to the todays level gives the conviction that CEE banks will promptly a
36、djust their business activities in respect to the new funding sources in order to mitigate the decreasing volume of deposits and to effectively use innovative structured products like securitisation to enhance these activities. Because of more costly interbank capital lending, bounded to the country
37、 rating, resulted from the Basel 2 regulations, banks in CEE will search for cheaper funding sources in order to meet the growing market needs in this part of Europe. However the all in costs for a securitisation transaction may be higher than under traditional funding, the sale of assets provides t
38、he banks with the new opportunities to originate more loans in order to transfer them later into standardised repeat deals 7, p.1. Fitch considers this argument as crucial, once the existence of regulatory reserve requirements made by the national central banks along with the financial covenants on
39、existing debt will encourage the CEE banks to undertake the funding activities without increasing the on balance sheet debt 6, s.5. The changes on the banks liability side include also the growing importance of borrowings but the below investigations will be mostly concentrated on the role asset sec
40、uritisation will play as a funding instrument. 3.1 The impact of Basel 2 on the banks funding in CEE It is likely that the liability side of a CEE bank will be influenced by the introduction of the New Basel Capital Accord. The way banks will acquire funding sources will have to be than adjusted to
41、the new banking environment. It is likely that based on the Basel 2 assumptions and growing liquidity needs bank will search for innovative funding instruments like securitisations in order to remain profitable in their core business activities. In the securitisation transactions, CEE banks belong t
42、o the group of originating rather than investing banks due to the fact that the assets are growing quicker than the liabilities and the fact that the Western countries accumulated more capital during the last fifty years than investors from Central and Eastern Europe. In respect to the above followi
43、ng effects on the banks funding possibilities can be seen compared to Basel 1 9, p.11.: 1. previously banks where divided in OECD and non OECD banks (20% and 100% risk weighted respectively) and now risk weighting is determined by sovereign rating of jurisdiction or by the bank issuer rating 982. si
44、gnificant change to corporate rating where previously all corporates were weighted 100% 3. Sovereigns, banks, members of OECD countries, had before 0% risk weighting while non- members 100%. Hence the sovereigns and OECD banks claims 3 will become less attractive in comparison to the previous situat
45、ion The below table show the comparison of the changes in the risk weights in respect to the claims on central banks and sovereigns in the selected Eastern European countries: Country Actual risk weighting (B1) Country Rating S Winter 1999/2000; 8, 2; ABI/INFORM Global, 3 Basel Committee on Banking
46、Supervision (2004): “International Convergence of Capital Measurement and Capital Standards A Revised Framework”, Bank for International Settlements, http:/www.bis.org/publ/bcbs107.htm 4 Boot, W. A. and A. Schmeits (1998): “Challenges to competitive banking: a theoretical perspective”, http:/www1.fe
47、e.uva.nl /fm/papers/Awaboot/english/competitive_banking_ResInE.pdf. 5 Chew D.,: “New Developments in Commercial Banking”, Basil Blackwell Ltd, Cambridge, Massachusetts 1991, 6 Eisinger N., “Securitisation in Emerging Markets”, Fitch Ratings, EIB Securitisation Conference, Warsaw 10.05.2007, http:/ww
48、w.eib.org /attachments/general/events/warsaw_10052007_eisinger.pdf 7 Elul R., The Economics of Asset Securitisation”, Business Review, Federal Reserve Bank of Philadelphia, Q3 2005, pp.16-25 1058 Hagen J. v., Dinger V.: “Banking Sector (Under?) Development in Central and Eastern Europe”, Zentrum fr
49、Europische Integrationsforschung, Bonn 2005, 9 ING Investment Grade Strategy & Research (2006): “Estimating the Basel II effect”, ING working paper, 3rd of July 2006, 10 Kendall T. L., Fishman M.,: “A Primer on Securitization”, The MIT Press, Cambridge, Massachusetts, London, England 1996, 11 Mullineux A., Murinde V., “Handbook of International Banking”, Edward Elgar Publishing, UK 2003, 12 Raiffeisen Research: “CEE Banking Sector Report”,Raiffeisen Zentralbank sterreich AG and Raiffeisen Centrobank A
