Business and Management: Finance
In the case mentioned, Creditors from Bank A cannot lay a claim on the assets that are from “Bank A MPT 2017.02” in case Bank A files for bankruptcy due to financial problems. During securitization, the assets of Ban A are relocated on an absolute basis to the SPV Bank AMPT 2017.02 (Gorton & Souleles, 2017). The total transfer of support makes the SPV have complete ownership of the assets, leaving bank A without any rights, interest, or title to the assets.
Banks receive their funds mainly from deposits and non-deposit sources. Bank deposits are always referred to as the lifeblood of any commercial bank, and they range from Term or fixed deposits, savings deposits, and current account deposits (Mayer et al., 2015). Non-deposit sources of funds from banks include banks’ funds, banks liquid assets, and lending received from other banks and profits made by the bank.
Net charge offs represent the debt owed to a company, and the company is unlikely to recover it. Provision for loan loss is the expense that a company sets aside for allowance for payments of loans and uncollected loans (Furlong & Knight, 2016). The difference between NCOs and PLL is that Provision for loan loss adds value for the reserve by building the reserve while Net charge offs empties the reserves by depleting them. The purpose of a PLL account is to provide the bank with a guarantee for its capitalization and solvency in the case of loan default.
Pass through security involves a combination of fixed income securities financed by a package of the batch of assets and have a single tranche. However, a collateralized debt obligation (CDO) contains tranches that contain different preferences for payments (Vink & Thibeault, 2014). A credit default swap (CDS) is made to aide in the transfer of credit exposure of fixed interest income from one party to the other. By engaging in the CDS market, the investor can receive payments from the swap buyer until the maturity date of the swap contract. Through the shift of credit exposure bearing fixed income, the investor can hedge risk.
References
Furlong, F., & Knight, Z. (2016). Loss provisions and bank charge-offs in the financial crisis: lesson learned. FRBSF Economic Letter, 2010, 16.
Gorton, S., & Souleles, N. S. (2017). Select purpose vehicles and securitization. The risks of financial institutions (pp. 549-602). University of Chicago Press.
Mayer, C., Schoors, K., & Yafeh, Y. (2015). Sources of funds and investment activities of venture capital funds: evidence from Germany, Israel, Japan, and the United Kingdom. Journal of Corporate Finance, 11(3), 586-608.
Vink, D., & Thibeault, A. E. (2014). ABS, MBS, and CDO pricing comparisons: An empirical analysis. The Journal of Structured Finance, 14(2), 27-45.