Question

QUESTION 24

1. A bank securitizes business loans. The Special Purpose Vehicle (SPV) and the investors in Asset-Backed Securities (ABS) are depositors in that bank.

   On a scrap paper, represent the changes in the balance sheets of the bank and the SPV. Then use your draft to fill the following multiple blanks. The scrap paper will not be uploaded but must be  kept for future reference.

   For each blank type a sign + or - to represent the net change (with no dollar sign) or X if that item is at a wrong location in the balance sheet or 0 if that item is at the right location but does not change (in net or at all).

   SPV  

   Assets Liabilities +Equity

   Loans:        Loans:

   Deposits:      Deposits:

   ESF:      ESF:

   ABS:   ABS:

   Bank   

   Assets Liabilities +Equity

   Loans:        Loans:

   Deposits:      Deposits:

   ESF:      ESF:

   ABS:   ABS:

   The bank has removed some credit risk  Type Y for true and N for incorrect.

   The bank has received some funds  Type Y for true and N for incorrect.

   Assume now that the bank securitises its loans (as before) and buys all the ABS from the SPV.  On a scrap paper, represent the changes in the balance sheets of the bank. Then use your answer to fill the following blanks. Keep your scrap paper for future reference.

   For each blank type a sign + or - to represent the net change with no dollar symbol or X if that item is at a wrong location in the balance sheet or 0 (the number zero) if that item is at the right location but does not change (in net or at all).

   Bank   

   Assets Liabilities +Equity

   Loans:        Loans:

   Deposits:      Deposits:

   ESF:      ESF:

   ABS:   ABS:

   The bank has removed some credit risk  Type Y for true and N for incorrect.

   The bank has received some funds  Type Y for true and N for incorrect.

Answer 1

SPV Balance Sheet
Assets =Liabilities +Equity
Loans:0        Loans:+
Deposits: +    Deposits:0
ESF: +    ESF:0
ABS:+   ABS:-
Bank Balance Sheet
Assets= Liabilities +Equity
Loans:-        Loans:+
Deposits:+      Deposits:-
ESF:0      ESF:0
ABS:0   ABS:+
The bank has removed some credit risk	Y
The bank has received some funds	N
Bank Buys the ABS from SPV
Bank
Assets Liabilities +Equity
Loans: -      Loans:+
Deposits:+      Deposits:-
ESF:-      ESF:+
ABS:+   ABS:0
The bank has removed some credit risk	N
The bank has received some funds	N