Economic Aspects of Securitization of Risk
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Basel III: Post-Crisis Reforms
Basel III: Post-Crisis Reforms Implementation Timeline Focus: Capital Definitions, Capital Focus: Capital Requirements Buffers and Liquidity Requirements Basel lll 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 1 January 2022 Full implementation of: 1. Revised standardised approach for credit risk; 2. Revised IRB framework; 1 January 3. Revised CVA framework; 1 January 1 January 1 January 1 January 1 January 2018 4. Revised operational risk framework; 2027 5. Revised market risk framework (Fundamental Review of 2023 2024 2025 2026 Full implementation of Leverage Trading Book); and Output 6. Leverage Ratio (revised exposure definition). Output Output Output Output Ratio (Existing exposure floor: Transitional implementation floor: 55% floor: 60% floor: 65% floor: 70% definition) Output floor: 50% 72.5% Capital Ratios 0% - 2.5% 0% - 2.5% Countercyclical 0% - 2.5% 2.5% Buffer 2.5% Conservation 2.5% Buffer 8% 6% Minimum Capital 4.5% Requirement Core Equity Tier 1 (CET 1) Tier 1 (T1) Total Capital (Tier 1 + Tier 2) Standardised Approach for Credit Risk New Categories of Revisions to the Existing Standardised Approach Exposures • Exposures to Banks • Exposure to Covered Bonds Bank exposures will be risk-weighted based on either the External Credit Risk Assessment Approach (ECRA) or Standardised Credit Risk Rated covered bonds will be risk Assessment Approach (SCRA). Banks are to apply ECRA where regulators do allow the use of external ratings for regulatory purposes and weighted based on issue SCRA for regulators that don’t. specific rating while risk weights for unrated covered bonds will • Exposures to Multilateral Development Banks (MDBs) be inferred from the issuer’s For exposures that do not fulfil the eligibility criteria, risk weights are to be determined by either SCRA or ECRA. -
Asset Securitization
L-Sec Comptroller of the Currency Administrator of National Banks Asset Securitization Comptroller’s Handbook November 1997 L Liquidity and Funds Management Asset Securitization Table of Contents Introduction 1 Background 1 Definition 2 A Brief History 2 Market Evolution 3 Benefits of Securitization 4 Securitization Process 6 Basic Structures of Asset-Backed Securities 6 Parties to the Transaction 7 Structuring the Transaction 12 Segregating the Assets 13 Creating Securitization Vehicles 15 Providing Credit Enhancement 19 Issuing Interests in the Asset Pool 23 The Mechanics of Cash Flow 25 Cash Flow Allocations 25 Risk Management 30 Impact of Securitization on Bank Issuers 30 Process Management 30 Risks and Controls 33 Reputation Risk 34 Strategic Risk 35 Credit Risk 37 Transaction Risk 43 Liquidity Risk 47 Compliance Risk 49 Other Issues 49 Risk-Based Capital 56 Comptroller’s Handbook i Asset Securitization Examination Objectives 61 Examination Procedures 62 Overview 62 Management Oversight 64 Risk Management 68 Management Information Systems 71 Accounting and Risk-Based Capital 73 Functions 77 Originations 77 Servicing 80 Other Roles 83 Overall Conclusions 86 References 89 ii Asset Securitization Introduction Background Asset securitization is helping to shape the future of traditional commercial banking. By using the securities markets to fund portions of the loan portfolio, banks can allocate capital more efficiently, access diverse and cost- effective funding sources, and better manage business risks. But securitization markets offer challenges as well as opportunity. Indeed, the successes of nonbank securitizers are forcing banks to adopt some of their practices. Competition from commercial paper underwriters and captive finance companies has taken a toll on banks’ market share and profitability in the prime credit and consumer loan businesses. -
Financial Literacy and Portfolio Diversification
WORKING PAPER NO. 212 Financial Literacy and Portfolio Diversification Luigi Guiso and Tullio Jappelli January 2009 University of Naples Federico II University of Salerno Bocconi University, Milan CSEF - Centre for Studies in Economics and Finance DEPARTMENT OF ECONOMICS – UNIVERSITY OF NAPLES 80126 NAPLES - ITALY Tel. and fax +39 081 675372 – e-mail: [email protected] WORKING PAPER NO. 212 Financial Literacy and Portfolio Diversification Luigi Guiso and Tullio Jappelli Abstract In this paper we focus on poor financial literacy as one potential factor explaining lack of portfolio diversification. We use the 2007 Unicredit Customers’ Survey, which has indicators of portfolio choice, financial literacy and many demographic characteristics of investors. We first propose test-based indicators of financial literacy and document the extent of portfolio under-diversification. We find that measures of financial literacy are strongly correlated with the degree of portfolio diversification. We also compare the test-based degree of financial literacy with investors’ self-assessment of their financial knowledge, and find only a weak relation between the two measures, an issue that has gained importance after the EU Markets in Financial Instruments Directive (MIFID) has required financial institutions to rate investors’ financial sophistication through questionnaires. JEL classification: E2, D8, G1 Keywords: Financial literacy, Portfolio diversification. Acknowledgements: We are grateful to the Unicredit Group, and particularly to Daniele Fano and Laura Marzorati, for letting us contribute to the design and use of the UCS survey. European University Institute and CEPR. Università di Napoli Federico II, CSEF and CEPR. Table of contents 1. Introduction 2. The portfolio diversification puzzle 3. The data 4. -
Understanding Securitization
Understanding Securitization It is important to have a general familiarity with mortgage securitization in order to understand the foreclosure process. Securitization involves a series of conveyances of the note evidencing the residential loan and assignment of the mortgage or trust deed securing it. Therefore, chain of title and beneficial interest issues frequently turn on the securitization trajectories. Securitization is the process pooling loans into “mortgage‐ backed securities” or “MBS” for sale to investors. MBS is an investment instrument backed by an undivided interest in a pool of mortgages or trust deeds. Income from the underlying mortgages is used to pay interest and principal on the securities. Figure A below is a simplified schematic depicting the general securitization process and some of the parties involved. The process begins with Originators, which are the lenders (such as banks or finance companies) that initially make the loans to homeowners. Sponsor/Sellers (or “sponsors”) purchase these loans from one or more Originators to form the pool of assets to be securitized. (Most large financial institutions are both Originators and Sponsor/Sellers.) A Depositor creates a Securitization Trust, a special‐purpose entity, for the securitized transaction. The depositor acquires the pooled assets from the Sponsor/Seller and in turn deposits them into the Securitization Trust. An Issuer acquires the Securitization Trust and issues certificates to eventually be sold to investors. However, the Issuer does not directly offer the certificates for sale to the investors. Instead, the Issuer conveys the certificate to the Depositor in exchange for the pooled assets. An Underwriter, usually an investment bank, purchases all of the certificates from the Depositor with the responsibility of offering to them for sale to the ultimate investors. -
Best Practices for Lease Insurance Specifications
BEST PRACTICES FOR LEASE INSURANCE SPECIFICATIONS CHECKLIST VERSUS NARRATIVE FORMAT William H. Locke, Jr. Graves Dougherty Hearon & Moody Austin, Texas ACREL Annual Meeting Leasing and Insurance Committees Chicago October, 2012 1685471v2 TABLE OF CONTENTS I. INTRODUCTION .......................................................................................................................................................... 1 A. Contractual Risk Allocation .................................................................................................................................... 1 B. Risk of Casualty Loss and Injuries in Leased Premises .......................................................................................... 1 C. Heightened Risk Concern Arising During Periods of Financial Distress ................................................................ 2 D. Annotated Forms ..................................................................................................................................................... 2 II. FORMS ........................................................................................................................................................................... 3 A. Lease Provisions ...................................................................................................................................................... 3 1. Form A.1. - Insurance Specifications as Exhibit to Lease ............................................................................... 3 A. General -
The Capital Asset Pricing Model (CAPM) Prof
Foundations of Finance: The Capital Asset Pricing Model (CAPM) Prof. Alex Shapiro Lecture Notes 9 The Capital Asset Pricing Model (CAPM) I. Readings and Suggested Practice Problems II. Introduction: from Assumptions to Implications III. The Market Portfolio IV. Assumptions Underlying the CAPM V. Portfolio Choice in the CAPM World VI. The Risk-Return Tradeoff for Individual Stocks VII. The CML and SML VIII. “Overpricing”/“Underpricing” and the SML IX. Uses of CAPM in Corporate Finance X. Additional Readings Buzz Words: Equilibrium Process, Supply Equals Demand, Market Price of Risk, Cross-Section of Expected Returns, Risk Adjusted Expected Returns, Net Present Value and Cost of Equity Capital. 1 Foundations of Finance: The Capital Asset Pricing Model (CAPM) I. Readings and Suggested Practice Problems BKM, Chapter 9, Sections 2-4. Suggested Problems, Chapter 9: 2, 4, 5, 13, 14, 15 Web: Visit www.morningstar.com, select a fund (e.g., Vanguard 500 Index VFINX), click on Risk Measures, and in the Modern Portfolio Theory Statistics section, view the beta. II. Introduction: from Assumptions to Implications A. Economic Equilibrium 1. Equilibrium analysis (unlike index models) Assume economic behavior of individuals. Then, draw conclusions about overall market prices, quantities, returns. 2. The CAPM is based on equilibrium analysis Problems: – There are many “dubious” assumptions. – The main implication of the CAPM concerns expected returns, which can’t be observed directly. 2 Foundations of Finance: The Capital Asset Pricing Model (CAPM) B. Implications of the CAPM: A Preview If everyone believes this theory… then (as we will see next): 1. There is a central role for the market portfolio: a. -
Famous People Related to Actuarial Science
Article from Actuary of the Future November 2018 Issue 43 with James to find market inefficiencies and start baseball- Famous People Related focused companies such as STATS LLC, which he later sold to Fox Sports. James was named one of Time maga- to Actuarial Science zine’s 100 most influential people in the world in 2006. By Harsh Shah • Howard Winklevoss, MAAA. Those who have seen the movie The Social Network or have read about the history of Facebook are familiar with twins Cameron and Tyler Win- klevoss. Their father, Howard Winklevoss, is an actuary. He is the founder of Winklevoss Consultants, a pension and benefits management firm. • Anette Norberg. Winner of the Olympic Gold Medal f you are reading this article, chances are you have heard about in curling in 2006 and 2010, Anette Norberg is the first actuaries or actuarial science before, but the average person is skipper in Olympic curling history to defend her title. likely unaware of those terms. What people might not realize Norberg was also the chief actuary at Nordea Bank AB Iis that there are many famous individuals connected with this and later appeared as a contestant on Swedish TV’s Let’s field. These are some of the exemplary individuals related to, Dance 2013. but not always known for, actuarial science. • Warren Buffett. One of the wealthiest people in the world, • Sir Edmond Halley. Largely known for his contributions Warren Buffett almost chose a career in actuarial science to astronomy and calculating the orbit of the comet named after meeting a Geico vice president in 1951. -
Chapter 3: Escrow, Taxes, and Insurance
HB-2-3550 CHAPTER 3: ESCROW, TAXES, AND INSURANCE 3.1 INTRODUCTION To protect the Agency’s interest in the security property, the Servicing and Asset Management Office (Servicing Office) must ensure that real estate taxes and any other local assessments are paid and that the property remains adequately insured. To ensure that funds are available for these purposes, the Agency requires most borrowers who receive new loans to deposit funds to an escrow account. Borrowers who are not required to establish an escrow account may do so voluntarily. If an escrow account has been established, payments for insurance, taxes, and other assessments are made by the Agency. If an escrow account has not been established, the borrower is responsible for making timely payments. Section 1 of this chapter describes basic requirements for paying taxes and maintaining insurance coverage; Section 2 provides procedure for establishing and maintaining the escrow account; and Section 3 discusses procedures for addressing insured and uninsured losses to the security property. SECTION 1: TAX AND INSURANCE REQUIREMENTS [7 CFR 3550.60 and 3550.61] 3.2 TAXES AND OTHER LOCAL ASSESSMENTS The Agency contracts with a tax service to secure tax information for all borrowers. The tax service obtains tax bills due for payment, determines the optimal time to pay the taxes in order to take advantage of any discounts, and provides delinquent tax status on the portfolio. A. Tax Service Fee All borrowers are charged a tax service fee. Borrowers who obtain a subsequent loan are not required to pay a second tax service fee. -
Arbitrage Pricing Theory∗
ARBITRAGE PRICING THEORY∗ Gur Huberman Zhenyu Wang† August 15, 2005 Abstract Focusing on asset returns governed by a factor structure, the APT is a one-period model, in which preclusion of arbitrage over static portfolios of these assets leads to a linear relation between the expected return and its covariance with the factors. The APT, however, does not preclude arbitrage over dynamic portfolios. Consequently, applying the model to evaluate managed portfolios contradicts the no-arbitrage spirit of the model. An empirical test of the APT entails a procedure to identify features of the underlying factor structure rather than merely a collection of mean-variance efficient factor portfolios that satisfies the linear relation. Keywords: arbitrage; asset pricing model; factor model. ∗S. N. Durlauf and L. E. Blume, The New Palgrave Dictionary of Economics, forthcoming, Palgrave Macmillan, reproduced with permission of Palgrave Macmillan. This article is taken from the authors’ original manuscript and has not been reviewed or edited. The definitive published version of this extract may be found in the complete The New Palgrave Dictionary of Economics in print and online, forthcoming. †Huberman is at Columbia University. Wang is at the Federal Reserve Bank of New York and the McCombs School of Business in the University of Texas at Austin. The views stated here are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System. Introduction The Arbitrage Pricing Theory (APT) was developed primarily by Ross (1976a, 1976b). It is a one-period model in which every investor believes that the stochastic properties of returns of capital assets are consistent with a factor structure. -
Expected Stock Returns and Volatility Kenneth R
University of Pennsylvania ScholarlyCommons Finance Papers Wharton Faculty Research 1987 Expected Stock Returns and Volatility Kenneth R. French G. William Schwert Robert F. Stambaugh University of Pennsylvania Follow this and additional works at: http://repository.upenn.edu/fnce_papers Part of the Finance Commons, and the Finance and Financial Management Commons Recommended Citation French, K. R., Schwert, G., & Stambaugh, R. F. (1987). Expected Stock Returns and Volatility. Journal of Financial Economics, 19 (1), 3-29. http://dx.doi.org/10.1016/0304-405X(87)90026-2 At the time of publication, author Robert F. Stambaugh was affiliated with the University of Chicago. Currently, he is a faculty member at the Wharton School at the University of Pennsylvania. This paper is posted at ScholarlyCommons. http://repository.upenn.edu/fnce_papers/363 For more information, please contact [email protected]. Expected Stock Returns and Volatility Abstract This paper examines the relation between stock returns and stock market volatility. We find ve idence that the expected market risk premium (the expected return on a stock portfolio minus the Treasury bill yield) is positively related to the predictable volatility of stock returns. There is also evidence that unexpected stock market returns are negatively related to the unexpected change in the volatility of stock returns. This negative relation provides indirect evidence of a positive relation between expected risk premiums and volatility. Disciplines Finance | Finance and Financial Management Comments At the time of publication, author Robert F. Stambaugh was affiliated with the University of Chicago. Currently, he is a faculty member at the Wharton School at the University of Pennsylvania. -
Mathematicians, Statisticians & Actuaries
Mathematicians, Statisticians & Actuaries An employment guide for newcomers to British Columbia Mathematicians, Statisticians & Actuaries An employment guide for newcomers to British Columbia Contents 1. What Would I Do? ..................................................................................... 2 2. Am I Suited For This Job? ........................................................................... 3 3. What Are The Wages And Benefits? ............................................................. 4 4. What Is The Job Outlook In BC? .................................................................. 5 5. How do I become a Mathematician, Statistician, or Actuary ............................. 5 6. How Do I Find A Job? ................................................................................ 7 7. Applying for a Job ................................................................................... 10 8. Where Can This Job Lead? ........................................................................ 10 9. Where Can I Find More Information? .......................................................... 11 Mathematicians, Statisticians & Actuaries (NOC 2161) Mathematicians, Statisticians & Actuaries may also be called: . consulting actuary . actuarial analyst . insurance actuary . demographer . statistical analyst . biostatistician 1. What Would I Do? Mathematicians, Statisticians & Actuaries research mathematical or statistical theories, and develop and apply mathematical or statistical techniques for solving problems in fields -
S a M P L E D O C U M E N T Allstate Insurance Company Standard
Allstate Insurance Company S Standard HomeownersA PolicyM Policy: P Effective: Issued to: L E D O C U M Allstate Insurance Company The Company Named in the Policy Declarations A Stock Company----Home Office: Northbrook, Illinois 60062 E AP1 N T Table of Contents General Definitions Used In This Policy..................................2 Insurable Interest and Our Liability .........................11 InsuringSAgreement....................................................3 What You Must Do After A Loss.............................11 Agreements We Make With You...............................4 Our Settlement Options............................................12 Conformity To State Statutes ....................................4 How We Pay For A Loss...........................................12 Coverage Changes......................................................4 Our Settlement Of Loss ............................................14 Policy Transfer .A...........................................................4 Appraisal.....................................................................14 Continued Coverage After Your Death.....................4 Abandoned Property.................................................14 Cancellation .................................................................4 Permission Granted To You.....................................14 Concealment Or Fraud ..M.............................................5 Our Rights To Recover Payment.............................14 Our Rights To Obtain Salvage..................................14