Security loan debts are viewed as bad debts

Loan securitization

Asset securitization, securitization of loan receivables in the form of securities, which can then be made tradable and placed on the capital market. In principle, all receivables that have regular cash flows are suitable for securitization: corporate loans, real estate loans, car loans, credit card debts and many more. The securities secured in this way are referred to as asset-backed securities (ABS).

The basic structure: First, a creditor, the originator (e.g. banks or credit card organizations) sells a pool of various credit claims to a company founded for this purpose (Special Purpose Vehicle - SPV). This special purpose vehicle issues securities or issues borrower's note loans and places them on the capital market. The securities are secured by the payment claims from the loans. The quality of the securities depends largely on the quality of the loan receivables sold. Since the investors are mostly unable to assess the quality, a rating agency is commissioned to assess the risks of the ABS. The original credit relationships between the lenders and borrowers are not changed, often the borrowers are not even aware of the passing on. The interest and redemption payments for the securities are mainly made from the return flows of the loans. A service agent is commissioned to collect the claims and all related administrative activities. In addition, a trustee is involved, often an auditing company, who is granted control rights in the interests of the investors.

Advantages of such ABS transactions for the originator are above all the procurement of liquid funds, which are usually very cheap for receivables with the best creditworthiness, and the improvement of the balance sheet ratios such as the equity ratio. Another advantage for credit institutions is that the receivables sold no longer have to be backed with own funds, which the legislature requires for high-risk transactions (Part 2 and Part 3 of the CRR). This creates a scope for granting new loans. ABS forms of investment are advantageous for investors, as they offer them the opportunity to participate in the broad diversification of receivables and to achieve a good risk-return ratio.

ABS transactions have also been widespread in Germany since the early 1990s. Since special ABS financing in the USA and the massive bad debt losses on real estate loans are seen as the trigger for the financial market crisis in 2008 (subprime crisis), the market for loan securitization subsequently collapsed. In the meantime, the securitization regulations for credit institutions have been tightened and an offset against the liable equity capital has been made for possible retention of risk from the sale of receivables.