Special purpose vehicle

Discussion in 'SA5' started by asbes, Mar 22, 2008.

  1. asbes

    asbes Member

    Hi

    What are the capital requirements for a SPV created when doing a securitisation?

    For example when a bank issues a MBS through a SPV and remove these mortgages from it's balance sheet, the capital requirements for the bank will reduce. Will there be any capital requirements for the SPV?

    Thanks!
     
    Last edited by a moderator: Mar 22, 2008
    asbes, Mar 22, 2008
    #1
  2. Meldemon

    Meldemon Member

    No explicit capital requirement that I am aware of - but would say the implicit capital requirement is that required to obtain the intended credit ratings for the bond tranches (eg. AAA, BB and junk), and those imposed by the buyers of the SPV's securities - i.e. the SPV needs to holds enough capital so investors are willing to buy its securities.

    Capital for the SPV could be specified as the stream of cashflows transferred into the SPV rather than capital in the traditional sense of the word - so would rather describe it as collateralisation. SPV's are generally over collateralised (particularly on the AAA tranche) to ensure any individual failures in the underlying mortgage pool doesn't impact on the tranche.

    If a sufficient number of mortgages fail, the whole thing falls flat. If the junk tranche was taken on by the bank setting up the SPV, the mortgage failures will hit the bank's own books and large asset losses occur (the kind that hits the evening news & severly impacts on share prices).
     
    Last edited by a moderator: Mar 25, 2008
    Meldemon, Mar 23, 2008
    #2
  3. Colin McKee

    Colin McKee ActEd Tutor Staff Member

    SPVs

    Hi
    I think this is probably the tip of a very large iceberg, and the legal complexities of SPVs, SPEs, and SPCs (I have no idea what the differences are between these - only heard them quoted) are probably numerous.
    My feeling is, as mentioned in the other student response, that SPVs generally have no capital requirement in most cases. In the simplest case, where there is only one tranche of bonds sold to investors, and where the investors get the rights to future capital and income from a bunch of mortgages, I think the investors accept the risk of any losses arising from default. As such, since the bank is not guaranteeing the bonds, there will be no capital required from the banks point of view. Also since the SPV is not guaranteeing the bonds, there will be no capital required from the SPV either. Capital will only be required in situations where the bank or SPV offers a guarantee of some sort.
    Where the bank buys a third party guarantee (for example Freddi Mac, ...) from the so called monolines, then these institutions would need capital in order to make those guarantees. So capital would be released from the bank and added at the monoline institution. However, this is not SPV capital, but monoline capital.
    Beyond that I dont have much knowledge.
     
    Colin McKee, Mar 24, 2008
    #3
  4. asbes

    asbes Member

    Thanks! I agree with your replies.

    Perhaps another reason is that a bank needs capital to protect its depositors whose money is used to give mortgages. If the mortgage assets defaults the depositors will lose if there were no capital. That is why the regulators has a responsibility here to force banks to hold sufficient capital.

    The SPV on the other hand has no liabilities to depositors but to investors who should scrutinise the issue prior to investing. This links to your reply about indirect requirements to get a certain credit rating.

    Does this make sense?
     
    asbes, Mar 25, 2008
    #4

Share This Page