Asset-Back Commercial Paper & Global Banks
Fitch Teleconference
August 23, 2007
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
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?
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
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
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
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
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
Summary US Banks in ABCP
US Commercial Banks
Liquidity Providers to ABCP
US Commercial Banks
Credit Enhancement to ABCP
March 31, 2007
March 31, 2007
# of Banks
$ Provided
# Rated F1+
# Rated F1
# Rated F2
# Rated B
# Unrated
Sponsored
Programs
Other
Programs
17
$309 bln
13
4
0
0
0
13
$19 bln
11
1
1
0
0
# of Banks
$ Provided
# Rated F1+
# Rated F1
# Rated F2
# Rated B
# Unrated
Sponsored
Programs
Other
Programs
16
$19 bln
11
3
1
1
0
10
$2.4 bln
4
1
2
1
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
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)
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-2007. This figure is still
only 6.9% of assets or 16.9% of their liquid assets and
marketable debt securities
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?
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
Asset-Backed Commercial Paper Liquidity
Facilities and Global Banks
Ian Linnell, Head of EMEA Bank Group
23 August, 2007
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%
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%.
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%
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
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
Asset-Backed Commercial Paper
John Bonfiglio, Group Managing Director, US Structured Finance
23 August, 2007
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
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
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
Q&A
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