Bill drafted for debt securitisation

first_imgThe government has drafted legislation that introduces debt securitisation, a financial instrument which it believes will help Cypriot banks alleviate the still-dire situation with Non-Performing Loans (NPLs).NPLs still constitute the biggest weak spot of the Cypriot economy, accounting for €23.7bn, or 47 per cent of total loans, according to March 2017 data.Responding to an MP’s question recently, finance minister Harris Georgiades said a bill on debt securitisation has been prepared and would soon be submitted to parliament.Under the legislation, banks would be able to set up companies to which they would transfer loans on their balance sheet. In turn, using the loans as collateral, these companies issue securities or bonds to investors.Debt securitisation was a measure requested of Cyprus by its international lenders, known as the ‘troika’.According to Georgiades, debt securitisation is yet another tool to tackle the high level of NPLs in the Cypriot banking sector.Other measures include legislation on leasing – already enacted – as well as a bill which introduces credit intermediaries, currently being debated in parliament.Securitisation is the process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors. Its stated aim is to promote liquidity in the marketplace.Mortgage-backed securities are a common example of securitisation. By combining mortgages into one large pool, the issuer can divide the large pool into smaller pieces based on each individual mortgage’s inherent risk of default and then sell those smaller pieces to investors.In securitisation, the company holding the loans, also known as the originator, gathers the data on the assets it would like to remove from its associated balance sheets. These assets are then grouped together by factors such as time remaining on the loan, the level of risk, the amount of remaining principle, and others.This gathered group of assets, now considered a reference portfolio, is then sold to an issuer. The issuer creates tradable securities representing a stake in the assets associated with the portfolio, selling them to interested investors with a rate or return.Such instruments may be described as bonds, pass-through securities, or collateralised debt obligations (CDOs).Critics have suggested that the complexity inherent in securitisation can limit investors’ ability to monitor risk, and that competitive securitisation markets with multiple securitisers may be particularly prone to sharp declines in underwriting standards. Private, competitive mortgage securitisation played an important role in the US subprime mortgage crisis.In addition, off-balance sheet treatment for securitisations coupled with guarantees from the issuer can hide the extent of leverage of the securitising firm, thereby facilitating risky capital structures and leading to an under-pricing of credit risk. Off-balance sheet securitisations also played a large role in the high leverage level of US financial institutions before the financial crisis, and the need for bailouts.You May LikeFigLeaf Beta AppTake Online Privacy on a whole New levelFigLeaf Beta AppUndoHistory By DaySee What Your City Used To Look Like 100 Years AgoHistory By DayUndoMarie Claire | HanacureMeet The Beauty Equivalent To TIME’s Person Of The Year AwardMarie Claire | HanacureUndo Concern over falling tourism numbersUndoTurkish Cypriot actions in Varosha ‘a clear violation’ of UN resolutions, Nicosia saysUndoTwo arrested in connection with attempted murderUndoby Taboolaby Taboolalast_img