Synthetic Securitisation

Synthetic securitisation has the potential to decrease systematic risk in the banking sector, reduce the leverage of banks and thereby improve their financial position.  Synthetic securitisation also has the economic advantage of weakening the link between banks deleveraging needs and credit tightening.  Access to securitisation can therefore have an impact on the availability and cost of credit for a wide range of economic actors including large corporates and small and medium sized enterprises. Synthetic securitisation involves transferring the credit risk of a pool of assets such as bank loans to corporate borrowers without transferring ownership of the assets themselves.  This is achieved using a financial guarantee or a credit derivative, such as a credit default swap, whereby the bank that originated the loans buys protection against losses that may arise on those assets.  The underlying assets remain on the bank's balance sheet, but the credit risk associated with them is transferred to third-party investors. Banks are motivated to engage in synthetic securitisation for a host of reasons including: (a) achieving regulatory capital relief by reducing risk-weighted assets;(b) maintaining ownership of the loan assets thereby enabling banks to continue managing client relationships and cross-selling opportunities; (c) synthetically securitising assets that are illiquid, hard to transfer, or have legal restrictions on sale; and (d) hedging specific credit exposures without altering the asset portfolio. The presentation will cover:

• the history of securitisation and the transition from traditional or ‘true sale’ securitisation to synthetic securitisation; 
• a comparison of true sale and synthetic securitisation together with current market statistics;
• the advantages of, requirement for, and regulation of simple, transparent, standardised synthetic securitisation; 
• the perspective of the originating banks including motivation and accounting & regulatory capital considerations; and 
• the perspective of investors in synthetic securitisation including risks, returns, and the due diligence carried out by investors in synthetic securitisation.