How To Understand The Abcp Market

Transcription

1 Asset-Back Commercial Paper & Global Banks Fitch Teleconference August 23, 2007

2 Participants > James Jockle, Managing Director Corp. Communications > Ian Linnell, Managing Director EMEA Fin l Institutions > James Moss, Managing Director North America Fin l Institutions > John Bonfiglio, Group Managing Director, Structured Finance

3 What Has Happened? > Market concern elevated by limited, but well publicized events: Extendible programs getting extended Mortgage risk Canada liquidity draws rejected A few programs get multi-notch downgrades > Hint of trouble in risk averse market produces predictable response > Primarily still a liquidity issue > Questions being asked Can banks fund? Will banks fund? What mortgage exposure is there?

4 Fitch s Response > ABCP programs review is ongoing > Extensions and liquidity draws are rare. Evaluate without overreacting > Looking at real estate beyond subprime > Review of bank liquidity programs is ongoing > Rating actions have been limited > Downgrades don t appear to be symptomatic of systemic issues > Liquidity assessment of banks: Looking at worst case scenarios not just ABCP, but all calls on bank liquidity

5 Why do Banks Use Conduits? > Single seller conduits Allows issuer to securitise assets and thus provides cheaper funding and often capital relief thus freeing up the balance sheet > Multi-seller conduits Provides finance to customers of the banks again at cheaper funding costs and often with capital relief > Securities arbitrage By funding short and lending long allows banks to take credit spread

6 Exposure by Conduit Type > Global outstanding currently breaks down between: Multi-seller, 50% Single-seller, 15% Securities arbitrage, 14% > Can be used as a proxy for EMEA bank exposure. US Banks slightly less than market in terms of single-seller exposure Single seller conduits core part of the business therefore $124 bln relatively sticky Securities arbitrage at $116 bln offers greater de-leveraging opportunities as assets mature Multi-seller dominates at $414 bln and banks have some flexibility to stop placing customer loans into the conduits. However, such a response would clearly add to the current credit crunch

7 Bank Exposure to the ABCP Market > Total outstanding ABCP market estimated at $1.15 trln at end-july 2007 > EMEA conduits account for $510 bln or 44% > However, includes Asian, US and non-bank entities. True figure for EMEA banks is $394 bln outstanding via 55 conduits > However, EMEA banks have significant conduits in the US ABCP market. Estimated at a total potential exposure of $434 bln via a further 53 conduits, ie outstanding plus committed facilities > In addition, banks are active liquidity providers to European and US nonsponsored conduits. However, this figure is estimated to be not that significant at $63 bln as most major conduits are bank sponsored and they typically provide 100% liquidity. This trend has accelerated recently as under Basel 2 it is much more expensive to provide liquidity facilities hence significantly lower syndication being done > Total estimated exposure of $891 bln for 44 banks via 108 conduits, although not true like-for-like

8 Extent of Contingent Liability Risk if Liquidity Lines are Drawn? > Total outstanding ABCP market is currently $1,150 bln > This is the same as the nominal sterling value of Barclay s balance sheet, ie in dollar terms, the total market is equivalent to only half of the size of one major European bank > Using conservative estimated EMEA bank exposure of $891 bln equates to average of just 3% of assets of the 44 banks > Typical bank therefore is well placed to meet funding calls arising from conduits > However, clearly exposures are not distributed evenly and specific banks will find this more of a challenge than others. Even in these cases Fitch is confident that potential financing needs arising from most conduits can be met > Most vulnerable banks are those with a combination of small-medium size, capital market financed, very large conduit and some concern re US sub-prime, e.g. IKB

9 Summary US Banks in ABCP US Commercial Banks Liquidity Providers to ABCP March 31, 2007 Sponsored Programs Other Programs # of Banks $ Provided $309 bln $19 bln # Rated F # Rated F1 4 1 # Rated F2 0 1 # Rated B 0 0 # Unrated 0 0 US Commercial Banks Credit Enhancement to ABCP March 31, 2007 Sponsored Programs Other Programs # of Banks $ Provided $19 bln $2.4 bln # Rated F # Rated F1 3 1 # Rated F2 1 2 # Rated B 1 1 # Unrated 0 2 > Relative to market, US banks under represented in single-seller > Primary role is liquidity support to sponsored funds > Bank universe limited in # and high in quality Source: FFIEC Call Reports, excludes brokers, thrifts and non-banks

10 US Banks: Exposure is Manageable > Highly rated banks involved > Exposure per bank is low > Higher exposed banks have lower risk programs > Limited liquidity draws noted to date > Commercial Bank Concentrations (Liquidity + Credit Enhancement) 10 banks, 2% of assets or below 4 banks, 2-5% of assets 9 banks, 5-10% of assets 2 banks, 10-15% of assets 2 banks, 25%+ of assets (State Street & Zions)

11 EMEA: Individual Bank Exposure > Conservative estimate of exposure is $891 bln > Distribution is generally widespread 20 banks, 2% of assets or below 12 banks, 5% of assets or below 9 banks, 10% of assets or below Tellingly only Landesbank Sachsen (31.2%) and IKB (28.1%) are in excess of 10% Plus one other German bank - Hypo Real Estate (18.7%), but understand is fully hedged > ABN AMRO frequently cited as the largest global liquidity provider at USD103.1 bln at end March This figure is still only 6.9% of assets or 16.9% of their liquid assets and marketable debt securities

12 Capital Implications of Support > Accounting perspective, mixed picture with many conduits consolidated under IFRS under the principle of risk and rewards > However, not the same from a regulatory perspective with most off balance sheet and therefore generating capital relief > Draw-downs under liquidity facilities will result in assets covered by the facility coming back on balance sheet > What are the capital implications of such an event?

13 Capital Implications of Support, cont. > Under Basel I many securities even though AAA rated would have received a 100% RW and an 8% capital charge > Under Basel II, Standardised Approach in place from 1 January 2007, as a result AAA securities, which dominate exposures, are weighted at 20% or 1.6% capital charge > Note at this rating level there is often not much difference between banking book or trading book treatment > Also, for temporary draw downs, regulators may chose not to impose a charge > From 1 January 2008, IRB Approach becomes active and charges likely to decline even further

14 Asset-Backed Commercial Paper Liquidity Facilities and Global Banks Ian Linnell, Head of EMEA Bank Group 23 August, 2007

15 Reconsolidation Securities Arbitrage Conduits > Assuming securities arbitrage conduits come back on balance sheet first, what are the implications? > Total exposure estimated at $116 bln. > Assume typical asset composition of 92% AAA (RWA $21.3 bln), 4% AA ($0.9 bln) and 4% unrated ($58 bln as deducted) > Total Tier 1 capital is $877.7 bln and average Tier 1 ratio is 8.10% > Above consolidation consumes 6 basis points of Tier 1 capital thereby reducing the average ratio to 8.04%

16 Reconsolidation All Conduits > Assuming all conduit exposures of $891 bln are drawn > Rating composition estimated at 98% AAA (RWA $174.6 bln), 1% AA (RWA $1.8 bln) and 1% unrated (RWA $111.4 bln) > Total Tier 1 capital is $877.7 bln and average Tier 1 ratio is 8.10x% > Above consolidation consumes 21 basis points of Tier 1 capital thereby reducing the average ratio to 7.89% > ABN example of $103.1 bln would at 20% RW bring back E15.4 bln of RWA and reduce Tier 1 by 41 bps to 7.76%.

17 Reconsolidation MTM issues > Note immediate balance sheet hit not the only issue > Under current market conditions likely to be some MTM losses despite high ratings > If assets held in the trading book, these will flow through the P&L > IF booked in the Available For Sale portfolio, flow directly to capital > If moved to Held to Maturity portfolio, will not be recognised > Key question is whether accounting losses will crystallise into economic losses > For illustrative purposes, a 5% loss on $891 bln is $44.6 bln or 5.1% of Tier 1 equity, this, combined with consolidation, would cost 61 basis points of Tier 1 capital lowering the average ratio to 7.49%

18 Example HBOS & Grampian > HBOS announced on 21 August that its conduit Grampian will no longer issue CP but instead use liquidity facilities provided by HBOS for economic reasons > Capital consequences are limited GBP 18 bln assets Assumption all are AAA therefore 20% RW Adds GBP3.6 bln to RWA of GBP285.5 bln Reduces Tier 1 ratio from 8.04% to 7.94% 10 basis point hit

19 Global Bank Summary > Yes the banks have a major exposure to the ABCP conduit industry > Yes the industry is currently experiencing unprecedented uncertainty which is clearly affecting pricing and making rolling ABCP more challenging > Yes this may make some conduits uneconomic and therefore we may see more draw downs on liquidity facilities > But on average exposures are manageable both from a liquidity (average 3% of assets) and capital perspective (21 basis points of Tier 1 capital) > Vulnerable banks are those with large conduits relative to assets size and are reliant on wholesale funding > However, currently Fitch sees no need to take any further rating action on banks as a result of their conduit exposure

20 Asset-Backed Commercial Paper John Bonfiglio, Group Managing Director, US Structured Finance 23 August, 2007

21 Liquidity Facilities > Cover the inability to roll CP for any reason > In most cases, sized to cover 100% of the face amount of outstanding CP > Typically provided by banks rated at least as high as the rating of the CP > Canadian example

22 ABCP Multiseller Asset Type Breakdown Not all RMBS / CDO exposure is Subprime related Assets generally of high quality "Other includes asset types that make up < 3% of the total multiseller invested amount

23 ABCP Securities-Backed Asset Type Breakdown Almost all assets are AAA and AA rated Not all RMBS / CDO exposure is Subprime related "Other includes asset types that make up < 3% of the total securities-backed invested amount

24 Q & A Click to edit Master title style

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