Loans from banks are something quite common in the modern world. Credits are requested both by individuals and large corporations for all kinds of purposes. However, this common practice is seen as one of the main reasons for the financial crisis which occurred in 2008 (Taylor, 2009). The explanation offered by the experts is that the problem lied in the fact that number of credits was rising, global savings were decreasing, while the long-term interested rates remained low (Taylor, 2009, pp. 4). The recession brought immense changes in terms of loaning policies and the decrease of 37% was recorded when it comes to the loans to large corporations and institutions (Ivashina and Scharfstein, 2010, pp. 319). This dramatic change is labeled as credit crunch – reduced ability of banks to give credits. Even the very phrase credit crunch is not new, it dates to the period of Great Depression (Mizen, 2008, pp. 531). One of the answers to the new situation was found in the covered bonds, utilized by some of the world’s largest banks, such as the bank of Sweden (Swedbank, 2014).
What are the covered bonds?
According to European Covered Bond Council, covered bonds are defined as (European Covered Bond Council, 2014):
Covered bonds are debt instruments secured by a cover pool of mortgage loans (property as collateral) or public-sector debt to which investors have a preferential claim in the event of default. While the nature of this preferential claim, as well as other safety features (asset eligibility and coverage, bankruptcy-remoteness and regulation) depends on the specific framework under which a covered bond is issued, it is the safety aspect that is common to all covered bonds.
Covered bonds used to be connected primarily with the...
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...es that will permit them to further examine the secured securities.
4. Guarantors of enrolled secured bonds profit from having the capacity to achieve a more extensive financial specialist base as some global moguls are confined from obtaining bonds issued under a non-authoritative structure.
5. Backers likewise profit from getting access to an option wellspring of subsidizing.
6. As an option wellspring of financing for banks, secured bonds help the increase in level of stability connected with the financial system.
7. It can be deducted from the previous point that stable financial system represents a basis for the stable economy of any country.
According to the previous list, it can be seen that the introduction of covered bond systems is beneficial to several groups. This does not exclude the benefits for the banks among which is the increase in margins.
The concept “credit crunch” was firstly introduced during the Great Depression of the 1990s. It refers to a reduction in the availability of loans and other types of credit at a given interest rate. Under a condition of credit crunch, banks are supposed to hold more capital than other time and become reluctant to lend with a fear of bankruptcies and defaults. In the 1990s, shortage of financial capital and low-quality borrowers forced the banks to reduce the loan supply. But that one of 2007 was more complicated than ever before.
Soonly after that, Banc One realized that swaps could also be used as an alternative for some of its conventional fixed-rate investments. Thus from 1983, Banc one began to use interest rate swaps to manage interest rate exposure. Banc One had more long term fixed rate liabilities than long term fixed rate assets and swaps could help in increasing their inflows of fixed rate when inflows of floating rate decreases and achieving perfectly match in their asset and liability. Therefore, mo matter increasing or decreasing in interest rate would result in a equal effect and offset each other’s impact on balance sheet. The benefits of using swaps as a kind of synthetic investment over conventional
Buch, C. 2013. 5. From the Stability Pact to ESM—What Next?. Stability of the Financial System: Illusion Or Feasible Concept?, p. 127.
What is a bond? Bonds are often considered by investors to be “financial IOU's.” Frequently, bonds are issued from banks designed for quick, upfront cash used in lending purposes, such as loans. When purchasing a bond, the buyer pays an upfront sum of money to the seller. By the terms and conditions...
Investment banks, Rating agencies and Insurance companies are key components of the financial market. In this presentation, I’m going to explain how these three key roles worked together to create the 2008 financial crisis.
From that perspective, if our model’s rates were lower than Deutsche Bank’s rates, the bond was underpriced in the market; therefore we would recommend buying the bond. This would allow investors to buy at a bargain since they would be paying less than what the bond is actually worth. Based on our results, we recommend that investors purchase the bonds with the maturities of three through nine years and the bond with a maturity of fifteen years. All of these bonds are underpriced in the market and should be purchased to take advantage of the arbitrage opportunities. We also recommend that investors should sell the bonds with maturities of one, twenty, and twenty-five years because their prices were greater than Deutsche Bank’s prices, thus making them overpriced in the market. The bonds with a two-year and ten-year maturities are, by design, equally priced between the two methods, so, nothing should be done with them. These are the findings that our group compiled and further information on our methodology, results, and recommendations will be provided in the paragraphs
The forced liquidation of some $3 trillion in private label structured assets has been deprived from the financial markets and the U.S. economy has obtained a vast amount of liquidity that the banking system simply cannot restore. It is not as easy to just assign blame within these case however it is noted that the credit rating agencies unethical decisions practices helped add onto the financial crisis of 2008 and took into account the company’s well-being before any other stakeholders.
The active secondary market for high-grade municipal bonds act as a mitigant to short term/ market session price volatility. Average daily trading volume in the municipal market is $10Bn. According to Merrill Lynch, the average typical bid offer spread is 1/4bps on 70% of the trades, ½bps on 20% of the trades and up to 4bps on the remaining. According to Bear Stearns and Lehman Brothers the typical bid/offer spread is 1/2bps on 75% of the trades. These tight spreads in the municipal market (particularly the high-grade market) act to mitigate against wide swings in the market which could lead to market losses on a municipal bond portfolio. Therefore, under a liquidation scenario, we feel confident that the collateral can be sold in a short time frame and with little risk of market price deterioration.
Zero coupon municipal bonds combine the benefits of the zero coupon instrument with those of tax-exempt municipal securities and offer the following advantages:
Foreign bonds can be defined as bonds that are issued by a global borrower and sold to investors in countries with currencies other than the currency in which the bond is denominated while Eurobonds are issued in a host country’s bonds market, in the host country’s currency, by a foreign borrower. This bond is subjected to the protocols enacted on all securities traded in the national market and sometimes to special regulations and disclosure requirements governing foreign borrowers.
There are mainly two incentives for the application of ABS transactions by banks. Firstly, banks use credit securitization as an alternative funding mode to emitting deposits.15 The second motive for the application of asset-backed securities is that they enable banks to transfer both market risks and credit risk out of the bank.
Catastrophe bonds are a new type of insurance securitization and have become increasingly popular in the insurance industry throughout the 21st century. Unlike traditional reinsurance products, cat bonds are “fixed income instruments issued primarily by insurers and reinsurers as a way of passing on their exposure to potential large financial risks associated with natural catastrophes” (Ip). in the form of an insurance linked security. These securities are designed to protect insurers and reinsurers against “super” catastrophes, or events that are high severity, but low frequency of occurrence, defined as having around a 1% or 1 in 100 years probability. Cat bonds first emerged in the 1990s, after hurricane Andrew and the Northridge Earthquake in California wiped approximately USD 30 billion off balance sheets of insurers and reinsurers. Insurers and reinsurers noticed the industry’s vulnerability to such “super” catastrophes. “The potential cost of a disaster had outgrown the capacity of the insurance industry to protect against it” (Ip). Reinsurers had to increase equity levels in order to protect against a natural disaster which increased the price for catastrophe risk. Although catastrophe bonds have parameters which strictly limit the type and location of a disaster they cover, cat bonds have had a positive impact on the insurance industry because cat bonds add reinsurance capacity through the financial market, cat bonds influence the price of traditional reinsurance, and cat bonds enable regional insurance carriers to expand underwriting.
Historically, the Malaysia Government Bond 10Y reached an all time high of 5.35 in April of 2004 and record low of 2.87 in January of 2009. Thus, the bond market in Malaysia are normally fluctuate, the risk taken by the bondholders could be minimized by getting ready homework about the bonds which are going to buy with. Bonds can be a great instrument to generate income and widely considered to be a safe investment, especially compared to equity securities such as stocks. However, However, investors need to be aware of some potential traps and risks to holding corporate and/or government bonds. Let us expose the bonds potential risks. Firstly is the inflation risk. When an investor buys a bond, he or she crucially commits receiving a rate of return, either fixed or flexible, for the period of the bond or at least as long as it is held. But what happens if the cost of living and inflation increase dramatically, and at a quicker rate than income investment? When that happens, investors will see their purchasing power corrode and may actually achieve a negative rate of return (because of factoring in
Bank guarantees are contractual undertakings generally arranged by banks in order to pay, or to repay a certain sum in case of some default in performance by the principal debtor of a contract with the creditor so as to facilitate the fine flow of trade and commerce in internal and international trade. The purpose of a bank guarantee is to secure all obligations of the contractor under a contract in such a way that it ensures that the owner is compensated in case of non performance without the need of prior legal actions. In lieu of cash deposits it has become a worldwide common practice to accept bank guarantee. The bank guarantees are preferred to other categories of guarantees due to the financial credibility enjoyed by the banking companies in the relevant market, as well as due to easiness to capitalize them.
In 2008, the world experienced a tremendous financial crisis which is rooted from the U.S housing market. Moreover, it is considered by many economists as one of the worst recessions since the Great Depression in 1930s. After bringing a huge effect on the U.S economy, the financial crisis expanded to Europe and the rest of the world. It ruined economies, crumble financial corporations and impoverished individual lives. For example, the financial crisis has resulted in the collapse of massive financial institutions such as Fannie Mae, Freddie Mac, Lehman Brothers and AIG. These collapses not only influenced own countries but also international scale. Hence, the intervention of governments by changing and expanding the monetary and fiscal policy or giving bailout is needed in order to eliminate and control enormous effects of the financial crisis.