Basel III and asset securitization

Abstract

Asset securitization via special purpose entities involves the process of transforming receivable assets into sellable securities that are issued to investors. These investors hold the rights to payments supported by the cash flows from an asset pool held by the said entity. In this thesis, aspects of the mechanism by which entities securitize assets into derivatives were investigated. In this case, these assets were found to act as a source of collateral for inter-entity sponsoring as well as a means of generating derivatives. During the 2007-2009 financial crisis, the securitization of assets was seriously inhibited. In response to this, for instance, new Basel III capital and liquidity regulations were introduced to re-establish securitization in order to support credit provision to the real economy and improve banks' access to funding globally. In this thesis, an investigation on the impact of a change in profit subsequent to a rating downgrade with the influence of bank features such as asset and derivative rates as well as liquidity was undertaken. In addition, connections between the aformentioned results and Basel III were given throughout the thesis. A VECM approach was further applied to Balance sheet liability and liquidity data to ascertain the relationship of the dependent and independent variables in the data set, and their behaviour in a short run and long run setup where observed. It was discovered that there were cointegrating equations, hence a long run relationship among the variables existed. The impact of shocks on the variables in a 12 quarterly future forecast was also given with SFR showing a more negative reaction to shocks in the LCR. This can be explained as being due to the fact that the BCBS introduced the LCR to be intended for 30 day stress scenario for banks to survive on, while the NSFR is meant for a longer period of 1 year. The failure of banks to survive on the LCR would mean tapping into the reserves of the NSFR. Hence a shock to the LCR would bring forth a negative reaction to the NSFR as was shown by the GIRFs.