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Synthetic Securitization

Banca Bohemia bank can achieve its desired result of not increasing capital requirement in synthetic securitization; this is because; synthetic securitization provides a hedge against loan default. Unlike the true-sale securitization, the loans will remain on the balance sheet, and the first loss trance goes to the investor or capital market. With synthetic securitization, a bank can manage its capital and credit risk more freely as it offers more flexibility in underlying loans (Kaya et al., 2017).

Both the synthetic and the true-sale securitization fall under the two rules for securitization; the capital requirement regulation and capital requirement directive. This means that BB needs to hold a 100% capital against asset nominal amount, and specific risk requirements have to be met by the clients before the bank can invest (Kaya et al., 2017). The creation of a simple, transparent, and standardized regime regulates the synthetic securitization and charges for synthetic excess spread.

Legal Provision to Achieve Bankruptcy Remoteness

Securitizations may be arranged employing a private company or securitization trust. A securitization trust serves the purpose of issuance of securities backed by assets transferred to it by the trustor. The securitization assets generate income which is used to pay back the investors. The revenue generated by the issuance of securities is used according to the provisions set in the securitization trust indenture (2021).

The securitization trust is an agreement between a securitization trustee and an originator, or unilaterally by the trustees. When an investor purchase securities, they adhere to this agreement as presented by the trustee and become beneficiaries. The trustee cannot change this agreement without the consent of the investor (2021). The list of operations in the legal framework that can be arranged through a securitization trust include;

  • Securitization of all assets that generate cash flow and loan portfolios.

  • Issuance of transfer of real estate assets that generate cash flow be done through commercial exploitation or liquidation to back the securities payments.

  • Assets arranged for specific projects, where the trust is integrated by design, technical studies, and other assets used to back payment of securities be issued.

  • Those used to finance public services or infrastructure whose securities are backed by cash flow generated in the future.

Special Purpose Corporation is regulated by a corporation or by law and a legal framework that creates some rules. The particular corporation is exempt from the direction of plurality in shareholders; hence it is only incorporated by one shareholder, in most cases the originator. Its purpose is to issue securities and acquire credit assets; its bylaws allow for the issued securities to select one member of the administrative organ (2021). There are limitations of a sole shareholder so;

  • At least one member must be independent and not related to the originator

  • The independent person has to vote if the corporation files for solvency

  • Independent accountants to prepare financial statements and registers

The standard structure used is the securitization trust because; it is autonomous from trustee estate, the trustor, and trustee beneficiaries; hence it is not liable to liabilities and obligations of the parties. Two, solvency regulations only apply to special purpose corporations. Transfer of assets in a securitization trust occurs under the transfer in trust. While in a special-purpose corporation, it can happen as a sale of assets or structured as a capital contribution. Securitization trusts are transparent from an income tax perspective.

Countries with Necessary Legal Opinions

The country with the needed legal opinion to ensure true-sale will be achieved is the European countries. The European policymakers aim to create a simple, transparent, and standardized securitization market (Kaya et al., 2017).

Legal Advantages for Over Collateralization

Banks use over-collateralization to get better terms in a loan, reduce the risk to potential investors by the issuer of securities that are asset-backed. It also increases the ratings for the borrower of the debt.

Credit Enhancement – is a critical step in securitization; it refers to the improvement of a credit profile for a financial product by reducing the risk. A good credit profile translates to a high credit rating which is essential for acquiring buyers for securitized assets. The credit enhancement cushions the risk investors face in a securitized product as it allows securities to absorb losses of default loans (Delivorias, 2016). When banks back up loans with assets that exceed their value, they reduce credit risk and enhance credit rating.

The Rule of Thumb – is the value of the underlying pool of assets, which is usually 10%- 20%. The excess asset-backed security ensures that payment of underlying loans if delayed or defaulted, the amount for the deposit can still be paid from the excess collateral. Over collateralization as opposed to tranching has the legal benefit of excess collateral in the principal value. The bank has an advantage in the extra collateral income cushioning the bank and investors from default losses through the income stream from the additional collateral. The bank does not need to source different investors like tranching; a single investor can accommodate the complete security.

Tranching Advantage

Tranching would have an additional advantage if sold to the EU financial institutions because the losses are divided up and the risk distributed according to the investor risk profile. The initial loss is absorbed by the equity or junior tranche until depleted; then mezzanine tranches take up additional losses, then the senior tranches. The level has different return policies and different degrees of priority in relation to cash flow. The advantage is that loss is absorbed by various entities and not one and also according to levels of seniority, which is usually insulated from the default risk of the asset pool (Delivorias, 2016). The most significant advantage is to the investors they do not absorb the whole weight of losses; instead, it is divided up and according to their credit profile, meaning no more than they can handle. The bank now has to source the tranches and estimate the level of investor risk they can take on.


2021. [online] Available at: <https://www.bakermckenzie.com/-/media/files/insight/publications/2020/09/global-securitisation-guide-2020-final_030920.pdf> [Accessed 17 August 2021].

Delivorias, A. (2016). Understanding Securitisation: Background, Benefits, Risks. European Parliament Research Service, PE56917.

Kaya, O., Schildbach, J., AG, D. B., & Schneider, S. (2017). Synthetic securitisation. Making a silent comeback. Deutsche Bank Research21, 2017.

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