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Banking Law > Set 2: Securitisation > Flashcards

Set 2: Securitisation Flashcards

(50 cards)

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1
Q

What is securitisation?

A

The process of pooling illiquid assets and transforming them into marketable securities sold to investors.

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2
Q

What is the main purpose of securitisation for banks?

A

To enhance liquidity, transfer credit risk, and free up capital for further lending.

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3
Q

What is an SPV in securitisation?

A

A Special Purpose Vehicle—an entity that purchases the asset pool and issues securities to investors.

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4
Q

Why is the SPV considered bankruptcy-remote?

A

It is legally separate from the originator, shielding investors from the originator’s insolvency.

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5
Q

What are the three main tranches in securitisation?

A

Senior (lowest risk), Mezzanine (moderate risk), and Junior/Equity (highest risk).

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6
Q

What are MBS?

A

Mortgage-Backed Securities—securities backed by pools of residential or commercial mortgages.

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7
Q

What are ABS?

A

Asset-Backed Securities—backed by loans such as auto loans, credit card debt, or student loans.

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8
Q

What is a CDO?

A

Collateralised Debt Obligation—a structured security backed by mixed debt instruments.

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9
Q

What is future flow securitisation?

A

Securitisation backed by expected future revenue streams (e.g., utility payments, oil revenues).

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10
Q

How do investors get paid in a securitisation?

A

Through the cash flows generated by the underlying asset pool.

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11
Q

What UK law governs regulated financial activities like securitisation?

A

Financial Services and Markets Act 2000 (FSMA).

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12
Q

What does Part 4A of FSMA require?

A

Authorisation for firms to engage in regulated activities like arranging investments.

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13
Q

What does Schedule 2 of FSMA define?

A

Specific regulated activities, including securitisation-related services.

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14
Q

What EU law governs securitisation transparency and due diligence?

A

Securitisation Regulation (EU) 2017/2402.

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15
Q

What does Article 5 of the Securitisation Regulation require?

A

Institutional investors must assess credit risk of securitised products.

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16
Q

What is the goal of Article 7 of the Regulation?

A

To ensure transparency by mandating disclosure of asset performance data.

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17
Q

What is the STS Framework?

A

A regime under EU regulation promoting Simple, Transparent and Standardised securitisations.

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18
Q

What capital rule framework also applies to securitisation?

A

Basel III—especially Pillars 1 (capital charges) and 2 (supervisory oversight).

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19
Q

What role does the FCA play in UK securitisation?

A

Regulates authorisation, disclosure, and conduct under FSMA.

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20
Q

Why are stricter rules applied to credit rating agencies?

A

To prevent misrating of risky securitised tranches and protect investors.

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21
Q

What was the issue in Glitnir Banki hf v Harrow LBC (2012)?

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A

Whether a local authority failed its fiduciary duty in investing in complex securities.

22
Q

What principle came from Glitnir v Harrow?

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A

Public bodies must understand and assess the risks of securitised investments.

23
Q

What was at stake in IKB v Morgan Stanley (2009)?

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A

Alleged misrepresentation of collateralised debt obligations (CDOs).

24
Q

What was the outcome of IKB v Morgan Stanley?

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A

Banks must disclose material risk information to investors.

25
What issue was addressed in FHFA v UBS (2013)?
Misleading MBS sales that understated subprime mortgage risks.
26
What legal concept did FHFA v UBS highlight?
Liability for material misstatements in securitised product offerings.
27
Why are these cases significant to securitisation law?
They highlight duties of disclosure, diligence, and fairness.
28
What risk was central in all three cases?
Asymmetric information and misrepresentation.
29
What role does judicial oversight play in securitisation?
It ensures transparency, investor protection, and regulatory compliance.
30
How have these cases influenced market behaviour?
By encouraging more rigorous due diligence and disclosures.
31
What is a major risk of securitisation?
Opacity in asset quality—investors may not know what's in the pool.
32
What is 'moral hazard' in securitisation?
Originators may reduce loan underwriting standards knowing risk is transferred.
33
How can tranching increase risk?
It adds structural complexity, which may mask asset quality or correlations.
34
What systemic risk did securitisation contribute to in 2008?
Amplification of financial crisis through widespread exposure to subprime debt.
35
How do rating agencies affect securitisation risk?
Inaccurate ratings can mislead investors and understate product risk.
36
What’s the risk of data opacity in SPVs?
Lack of real-time asset performance data may misrepresent risk.
37
Why are junior tranches riskier?
They are paid last and bear the first losses if the asset pool underperforms.
38
What is the investor risk in MBS and ABS?
Early repayment, default, or inaccurate performance predictions.
39
What challenge does securitisation pose for regulators?
Monitoring complex cross-border structures and derivatives.
40
What’s a post-crisis regulatory goal for securitisation?
To ensure simplicity, transparency, and adequate capital buffers.
41
What does Cranston argue about originator incentives?
That securitisation may weaken their incentive to screen loan quality.
42
What does Cranston say about the financial crisis?
Securitisation didn’t cause it, but significantly worsened its effects.
43
What is Amao's critique of SPVs?
They obscure true risk and complicate investor due diligence.
44
What does Amao propose for better investor protection?
Simpler structures and enhanced disclosure obligations.
45
What’s the main academic consensus post-crisis?
Transparency and accountability must be central to securitisation reform.
46
What future challenge does Amao highlight?
Complexity and lack of uniform regulation across jurisdictions.
47
What role does the Basel III framework play post-2008?
Imposes capital requirements and risk assessments on banks’ securitised exposures.
48
What market trend emerged after COVID-19?
Increased demand for transparency and risk resilience in securitisation products.
49
How are regulators improving cross-border oversight?
Through harmonised standards like STS and Basel guidance.
50
What is the core lesson from securitisation’s evolution?
Balancing innovation and risk control is essential for sustainable finance.

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