Le Magazine du Trésorier - n°60 - 4eme trimestre 2007 - (Page 6)

DOSSIER SUB-PRIME CREDIT CRISIS : IGNORE AT YOUR PERIL BY MICHAEL GEORGER, AVANTAGE CAPITA Ltd(1) The sub-prime crisis has led to a rethink about deal information, risk profiles, and assumptions taken in the lending process. While the full ramifications are still being worked out, what is clear is that the fall out has not ended. The US Mortgage sub-prime crisis has mass global implications on the Asset Backed Securities (ABS) investment. The credit crunch has demonstrated to investors and to the banking industry overall that many assumptions made in ABS dealing and the flow of information are not necessarily transparent, reliable or objective. The recent market crisis has identified the need for credit institutions, including retail credit institutions, to revisit how they finance themselves and prepare for a liquidity crisis. This crisis has highlighted the inadequacy of some business models and business processes and the need for more integrated capture and modelling of timely, transparent risk information related to ABS and funding exposures. Credit institutions and investors do not have the appropriate information about the degree of exposure a counterpart or investor has to the sub-prime credit change. This uncertainty of information upon which decisions are made, has certainly led to increased volatility, lowered liquidity and has raised the cost of capital. This note focuses on the implications of the crisis on ABS and liquidity. It makes practical recommendations of the actions that credit institutions and investors need to take. Credit institutions and investors could take a positive approach to the sub-prime crisis by using it as an opportunity to fully integrate and break down information and measurement boundaries within their risk processes. In reality, it is unlikely that credit institutions and investors ever had transparent, integrated, and timely information on the positions and underlying liquidity, market, operational and credit exposures. A contributing factor for this lack of transparent information is the market mechanism for trading ABS securities. Additionally, the credit institutions have not considered the funding risk for ABS supported through Commercial Paper (CP) issuance. The CP market has withdrawn funding for ABS tranches almost overnight. With the exception of those institutions with effective dynamic credit processes, credit institutions could better track their daily risk and liquidity exposure from credit derivatives, underlying asset pools and investments. Credit institutions and investors could enhance their awareness of underlying customer behavioural assumptions through more frequent analysis on specific customer pools specific to the securities that they hold or are significantly exposed to. The underlying data pools of ABS can change and it is this fluidity that makes it difficult to find information or to track information. Most customer pool information is not readily and timely available. Such information is generally only completed at the outset of the issuance of a security and not updated through its life. If such information were available it would provide a better understanding of prepayment or other market or liquidity behavioural changes. While general data on prepayment is commonly used in practice as a basis of assumptions, pool specific data could be quite different and provide valuation changes. Le Magazine du Trésorier - N° 60

Table des matières de la publication Le Magazine du Trésorier - n°60 - 4eme trimestre 2007

Couverture
Pub
SOMMAIRE
EDITORIAL
LA PAROLE À ... : PHILIPS INTERNATIONAL - MARK KIRKLAND
DOSSIER - SUB PRIME CREDIT CRISIS
15 MINUTES AVEC...
VIE DE L’ASSOCIATION
EACT
BRÈVES
INTERNET

Le Magazine du Trésorier - n°60 - 4eme trimestre 2007