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on Corporate Finance |
| By: | Janet Mitchell (National Bank of Belgium, Department of International Cooperation and Financial Stability) |
| Abstract: | Structured finance instruments represent a form of securitization technology which can be defined by the characteristics of pooling of financial assets, delinking of the credit risk of the asset pool from the credit risk of the originating intermediary, and issuance of tranched liabilities backed by the asset pool. Tranching effectively accomplishes a "slicing" of the loss distribution of the underlying asset pool. This paper reviews the finance literature relating to security design and securitization, in order to identify the economic forces underlying the creation of SF instruments. A question addressed is under what circumstances one would expect to observe pooling alone (as with traditional securitization) versus pooling and tranching combined (as with structured finance). It is argued that asymmetric information problems between an originator and investors can lead to pooling of assets and tranching of associated liabilities, as opposed to pooling alone. The more acute the problem of adverse selection, the more likely is value to be created through issuance of tranched assetbacked securities. Structured finance instruments also help to complete incomplete financial markets, and they may also appear in response to market segmentation. |
| Keywords: | Structured finance, securitization |
| JEL: | G10 G12 G20 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:docwpp:200507-1&r=cfn |
| By: | Johan Devriese (National Bank of Belgium, Department of International Cooperation and Financial Stability); Janet Mitchell (National Bank of Belgium, Department of International Cooperation and Financial Stability) |
| Abstract: | This paper studies the potential impact on securities settlement systems (SSSs) of a major market disruption, caused by the default of the largest player. A multiperiod, multisecurity model with intraday credit is used to simulate direct and second-round settlement failures triggered by the default, as well as the dynamics of settlement failures, arising from a lag in settlement relative to the date of trades. The effects of the defaulter's net trade position, the numbers of securities and participants in the market, and participants' trading behavior are also analyzed. We show that in SSSs - contrary to payment systems - large and persistent settlement failures are possible even when ample liquidity is provided. Central bank liquidity support to SSSs thus cannot eliminate settlement failures due to major market disruptions. This is due to the fact that securities transactions involve a cash leg and a securities leg, and liquidity can affect only the cash side of a transaction. Whereas a broad program of securities borrowing and lending might help, it is precisely during periods of market disruption that participants will be least willing to lend securities. Settlement failures can continue to occur beyond the period corresponding to the lag in settlement. This is due to the fact that, upon observation of a default, market participants must form expectations about the impact of the default, and these expectations affect current trading behavior. If, ex post, fewer of the previous trades settle than expected, new settlement failures will occur. This result has interesting implications for financial stability. On the one hand, conservative reactions by market participants to a default - for example by limiting the volume of trades - can result in a more rapid return of the settlement system to a normal level of efficiency. On the other hand, limitation of trading by market participants can reduce market liquidity, which may have a negative impact on financial stability. |
| Keywords: | Securities settlement, liquity risk, contagion |
| JEL: | G20 G28 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200507-2&r=cfn |
| By: | Christian Calmès (Département des sciences administratives, Université du Québec en Outaouais et LRSP); Ying Liu (Bank of Canada) |
| Abstract: | Data suggest that the Canadian financial structure, and particularly indirect finance (e.g., banking), have become more market-oriented. we associate this financiel trend in part with the regulatory changes that have occured in Canada since the 1980s. Financial intermediaries are increasingly involved with financial market activities --e.g. off-balance sheet (OBS) activities such as underwriting securities. For this reason, we analyze the noninterest income attributable to financial market activities. We find that the variance of Canadian banks' aggregate operating-income growth is rising because of the increased contribution of noninterest income. This component is by nature quite volatile compared to interest income. Consequently, our analysis corroborates the U.S. finding of Stiroh (2004), and Stiroh and Rumble (2005): By contributing to banking income volatility, market-oriented activities do not necessarily yield straightforward diversification benefits to Canadian banks. |
| Keywords: | Regulatory changes, indirect finance, noninterest income, diversification |
| JEL: | G20 G21 |
| Date: | 2005–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:pqs:wpaper:0302005&r=cfn |