() The study of Optimal Asset Allocation of Banks after Asset-backed Securitization and write off NPL with securitization
CALCapital Allocation Line
Abstract In the financial industry, typical indirect-financial institution attracts deposit, inter-bank loan, or issuing negotiable certificate of time deposit and bonds.after collecting money from excess capital units through auditing procedure then loan to the needed parties as a financial intermediary in the market. The roles of financial institutions such as banks are acting as a financial intermediary by providing buy-sell funding to enterprises or individuals. Those banks actually take whole funding liquidity risk to exchange main resource of bank s profitability. Once failure in managing risk or facing dynamically financial environment changing, bank may engage in difficulty and cause serious financial crisis. Comparison with large international financial institutions, our financial institutions hold a lot of NPL (Non-Performing Loan; Taiwan major NPL almost came from mortgage), it not only lower the liquidity of fund, longer payment duration but also raise operation risk can t recover financial assets. The quality of asset has also been worse off rapidly. These phenomena raise financial institution operation risk and influence stability of financial system and development of financial environment. With the financial environment is changing, those developed countries mostly adopted structured finance or financial asset securitization methods. The purpose of financial asset securitization in general is to raise fund for originator. Originator is the most important participant on the securitization process. The originators pool and reorganize those assets, which could create cash flow into small-amount unit security and sell to the investors. By this way originator don t have to wait till maturity and buyback those securities. That is why by using financial asset securitization will help financial institution to improve asset/liability management, spread asset risk and increase the ratio of equity to assets. At the same time, this will improve the effect and efficiency of finance institution s operating and open up the funding market. Mortgage securitization can raise banks capital adequacy and current ratio. By way of asset securitization, the originators enjoy higher asset liquidity, lower funding cost, and improved capital ratio; while investors can use mortgage-backed securities to diversity their portfolios,
improve liquidity and enhance yields. For originators, securitization is not only lower the cost of capital, increase the net profit but also enhances the liquidity of cash and balances the assets structure. Assets-backed securitization has been prevailed in USA for years. It effectively controls the NPL (Non-performing Loans) problem and stabilizes financial management. Through financial asset securitization optimal asset allocation model, this thesis has the following finding: 1. Financial market funding supply shows multiple effects after Banking Financial asset securitization. In the initial stage of securitization, banks will lower risky assets and then will increase to original size. 2. After Financial asset securitization, a capital adequate ratio will rise first then become normal level. 3. Under assumption that financial asset securitization does not create any capital gain or loss; bank will lower profitability at initial stage. Then after a while, profitability will increase dramatically later. 4. After consideration of risk, this research discovers that securitization wills steeper Capital Allocation Line. It means every risk taking will compensate higher return. Improve Banking efficiency and profitability. Securitization provides a groundbreaking tool to increase profitability and avoid risk. Under MBS structure, the commissions and fees, absolutely out of risk, is major and stable income of the bank. On the other hand, the successful development of USA RTC implement is another contribution to resolve NPL. In sum, financial asset securitization not only accelerates the efficiency of financial institutions for more balance capital markets but also avoids financial risk in the banking system. At present, the prime theme of he banking sector should be how to maintain sound operations by strengthening credit risk management and restructure assets quality. Introducing successful external professional partner system is another way to deal with NPL problems.
Asset-backed securitizationprepaymentpass Through securityasset-backed bonspay through SecurityDurationReserve ratiocapital adequate ratioeffect frontiercal ( Capital Allocation Line) AMCRTCNon-performing Loans
10 10 MBA 10 10 AMC RTC
CALCapital Allocation Line RTC --- 18 12
----------------------------------------------------------- -------------------------------------------------------------------- ----------------------------------------------------------- -------------------------------------------------------------------- ------------------- -------------------------- -------------------------- ----------------------------------------------- ------------------------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- ----------------------------------------- -----------------------------------------------------
------------------------------------------- -------------------------------- ----------------------------------------------- -----------------------
3-1 ---------------------------------------------- 35 3-2 ------------------------------------------------------------------- 47 3-3 ---------------------------------------------------------------------- 48 3-4 S&P s ------------------------------------- 49 3-5 Moody s ----------------------------------------------------------------- 50 3-6 2002 ABS MBS ----------------------------- 52 3-7 2002 MBS ----------------------------------------------- 52 3-8 ---- 58 3-9 ------------------------- 58 3-10 ABS ABB ------------------------------------------------------------------------- 60 4-1 ---------------------------------------------------------------------- 93 4-2 ------------------------------------------------------------- 94 4-3 30 ------------------------------------------------- 96 4-4 50 ------------------------------------------------- 97 4-5 70 ------------------------------------------------- 98 4-6 ---------------------------------------------------- 103 4-7 ---------------------------------------------------------------------------- 104 4-8 ---------------------------------- 105 4-9 ---------------------------------- 106 4-10 ---------------------------------------- 107 4-11 ---------------------------------- 108 5-1 RTC 1992-N1A ------------------------------------------------- 152
7 27 28 29 32 34 34 35 36 37 38 43 47 55 57 59 62 64 65 67 81 82
83 83 88 110 112 113 114 115 115 115 116 116 116 117 120 122 123 131 151 154 154
1
2
Harry Markowitz 3
RTC 1990 RTC 1991-1 1992 RTC 1992-N1A 4
5
6
7
8
9
--- 10
11
12
13
14
15
16
--- 17
18
--- 19
20
21
22
2000 AMC RTC AMC RTC AMC RTC 2001 RTC 1980 1990 23
FDIC1998 Managing the CrisisThe FDIC and RTC experience 1980 1990 FDIC RTC 24
FDIC RTC 25
Equity Asset-backed Securitization Real Estate Securitization Real Estate Securitization 1. REIT Real Estate Investment Trust 2. Limited Partnership 3. REITReal Estate Investment Trust Asset-Backed Securitization 26
3-1 27
Structured Finance Credit UnionSavings & Loans Mutual Bank Spread (Asset-Backed Securitization) (Pooling) (Securities) (Credit Enhancement) 3-2 28
3-3 5. 6. 29
Balance Sheet Maturity Mismatch savings & loans( ) 0 30
Institutional Mismatch Pension Fund --- CMOCollateralized Mortgage Obligation Commercial Bank & Thrift 31
USD, Trillions 3-4 32
33
MBS Card M.H ousing Auto HEL C BO/CDO E.Lease Student Other 2002:Q3 3-6 34
3-1 3-7 35
3-8 Bloomberg 36
37 3-8 3-9 GNMA FNMA FHLMC Total Issuance of Agency Mortgage Backed Securities Issuance of Agency Mortgage Backed Securities - 200.00 400.00 600.00 800.00 1,000.00 1,200.00 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002:Q3 $ Billions
3-10 off balancesheetization Asset-backed BondABB / 38
3-3 3-3 39
40
41
3-11 / 42
Class 1 Class 2 Class 3 Class 4 3-11 / --- 43
44
45
46
3-12 47
3-3 48
3-4 AAA AA AAA A BBB BB B CCC CC C (Income Bonds) D 49
3-5 50
51
3-6 3-7 52
53
54
3-13 55
56
3-14 57
errill Lynch Credit Risk A GNMAFNMA Liquidity FHLMC Issue Price Call Provision Frequency Settle 58
3-15 59
ABS ABB 60
61
3-16 62
63
64
65 GNMA FNMA FHLMC 2002:Q3 Issuance of Agency CMOs
66
3-19 67
2 68
69
70
c 71
72
73
74
75
76
77
78
79
80
3-20 81
( ) 350 000 300 000 250 000 200 000 150 000 100 000 50 000 0 87 88 89 90 91 3-21 82
91 3-22 84 867,140 92,200... 85 996,277 250,443... 86 1,034,831 323,228 68,890 87 1,043,899 518,935 92,420 88 1,245,232 590,149 97,796 89 1,480,335 707,304 91,668 90 1,858,304 808,522 202,611 91 2,214,536 1,006,537 377,303 3-23 83
Private Placement George & Mary Card 84
85
86
87
4-1 88
1 2 3 4 5 N LR LR 2 LR 3 LR 4 LR 5 LR n LLR LRLR 2 LR 2 LR 3 LR 3 LR 4 LR 4 LR 5 LR n-1 LR n L (1 R) L(1 R) 1 R (1 ) 89
(1 ) 1 (1 ) L(1 R) 1 R 90
12.5 91
92
4-1 5 7 93
(1) 0 (2) (3) OECD (4) OECD OECD 0 10 20 50 (1) 20 (2) OECD OECD (3) OECD OECD (4) OECD (5) 50 (1) (2) OECD (3) OECD 100 (4) (5) (6) (7) (8) 94
Capital Gain 95
4-3 5 7 96
4-450 5 7 97
4-570 5 7 98
99
100
L ( 1 R ) L ( 1 R ) (1 R ) d D + E (1 R) 101 (1 R ) d D + E (1 R)
102
103
1 2 3 4 5 N LR LR 2 LR 3 LR 4 LR 5 LR n LLR LRLR 2 LR 2 LR 3 LR 3 LR 4 LR 4 LR 5 LR n-1 LR n 104
105
106
107
108
109
Expected Return =0 =0.5 =1 Risk 4-2 110
111 B A var iance Co
4-3 112
CAL C CAL B Spread CAL A Risk 4-4 113
CAL C CAL B CAL A Spread Risk 4-5 CAL 114
Spread Risk 4-6 Risk---Spread Spread Risk 4-7 Spread Risk 4-8 115
116 Risk Spread 4-10 CAL Risk Spread 4-9 CALCapital Allocation Line Risk Spread 4-11 CAL
SLB Securitization Line of Bank S 3 Spread SLB S 2 S 1 R R Risk 4-12SLB R R S 1 S 2 S 1 S 3 SLB --- Merrill Lynch Morgan Stanley UBS 117
118
119
5 120
121
( 8412 3 515 2 694 35 786 8512 5 105 3 736 45 1 324 8612 5 865 4 428 60 1 377 8712 7 303 5 616 91 1 596 8812 8 833 6 773 172 1 888 8912 10 211 7 983 186 2 042 901213 274 11 275 185 1 813 911210 747 9 093 113 1 540 5-2 9245 122
( 8412 3.00 2.88 0.82 4.02 8512 4.15 3.74 1.00 7.10 8612 4.18 3.74 1.07 8.53 8712 4.93 4.41 1.64 10.57 8812 5.67 4.96 3.20 13.70 8912 6.20 5.47 3.22 15.68 9012 8.16 7.70 3.53 16.39 9112 6.84 6.39 2.36 15.37 5-3 9245 123
124
125
126
127
( 8412 3 515 2 694 35 786 8512 5 105 3 736 45 1 324 8612 5 865 4 428 60 1 377 8712 7 303 5 616 91 1 596 8812 8 833 6 773 172 1 888 8912 10 211 7 983 186 2 042 901213 274 11 275 185 1 813 911210 747 9 093 113 1 540 5-2 9245 128
( 8412 3.00 2.88 0.82 4.02 8512 4.15 3.74 1.00 7.10 8612 4.18 3.74 1.07 8.53 8712 4.93 4.41 1.64 10.57 8812 5.67 4.96 3.20 13.70 8912 6.20 5.47 3.22 15.68 9012 8.16 7.70 3.53 16.39 9112 6.84 6.39 2.36 15.37 5-3 9245 129
130
AMC AMC AMC 5-4 131
132
133
134
135
Special Puepose Corporate 136
Special Purpose Trust 137
138
Pool Asset Fixed Income Securities 139
/ / / 140
141
Partnership RTC RTC RTC RTC General Partner RTC Limited Partner RTC RTC RTC RTC RTC JDC (Judgements,Deficiencies,andCharge-offs JDC)JDC RTC 142
143
144
145
146
l C 147
148
149
RTC FDIC 150
-5 151
RTC RTC1992-NlA 432 432 235 104 103 152
153
1. 2. 3. 4. 1992 N1A L.P Class 1 Class 2 Class 3 Class 4 154
155
156
RTC AMC AMC AMC AMC AMC Asset Backed BondABB Asset Backed BondABB Asset Backed BondABB AMC Asset Backed BondABB 157
Capital Gain Loss Return--- Risk Capital Allocation LineCAL Fixed Income SLB Portfolio manager RTC 158
AMC AMC AMC Asset Backed BondABB Asset Backed BondABB Asset Backed BondABB AMC AMC 159
160
161
162
Federal Deposit Insurance Corporation The FDIC and RTC experience---managing THE CRISIS 1999 2000 2000 2000 2000 --- 2001 AMC 2002 2002 --- 2002 --- 163
(Reference) Frank J. Fabozzi1993Fixed Income MathematicsAnalytical & Statistical TechniquesMcGraw-Hill, Inc. Laurence G. Taff2003Investing in Mortgage SecuritiesCRC Press LLC 164