The asset-backed securities market has come a long way since the collateralized mortgage obligation, its first offspring, was born in 1983. But commercial banks are hesitant players in this increasingly diverse, $88 billion arena.
This was not always the case. When the Bank for International Settlements tightened capital requirements in 1988, many banks turned to securitization to wipe assets off their balance sheets to conform with the new regulations.
In the late '80s and early '90s, banks represented some 40% of the securitization market, says Jason Kravitt of Chicago-based law firm Mayer Brown & Platt, which specializes in asset-backed deals.
By 1992, bank participation had dropped back to 23.8%, as interest rates came down and institutions recovered from their credit quality crises.
Commercial banks have slowly come back into the market ever since, Mr. Kravitt says, mostly because of the vast number of bank-issued credit cards.
"The banks are the largest player in the credit card securitization arena, for the obvious reason: You have to be a bank to issue a credit card," says Charles Kerner, a vice president in the asset finance group at J.P. Morgan Securities.
"The growth in banks' consumer lending business means they have more assets to securitize. The economy is stronger and people charge more on their credit cards. That leads to more securitizations," he adds.
Indeed, credit card receivables overwhelmingly dominated the deals that banks did in asset-backed shares, accounting for nearly two-thirds of the $23.8 billion in total issues by such institutions in 1994.
Although a handful of banks securitized home equity, auto, and student loans last year, these issues were way behind credit cards in both the number of deals and the amounts.
Observers say this phenomenon is basically a result of need. Banks use securitizations as an alternative source of funding. Securitizations are typically triple-A rated, and for banks whose bonds are in the B range, it means money on the cheap.
Asset-backed deals can also provide a nice balancing act for deposits, which threaten to get more expensive with each ratchet up in interest rates by the Federal Reserve Board.
And, securitizations provide an elegant form of balance sheet management, moving large amounts of assets off the books while providing cash flow to support more lending.
Once a bank is at work creating loan pools and conduits, it can earn juicy bits of fee income acting as an administrative agent for these vehicles.
This is true when it securitizes its own assets, or helps a customer with an asset-backed issue. There is also money to be made providing letters of credit or other enhancements to guarantee asset-backed deals.
But just as banks have been hesitant to wander far afield in their own asset-backed issuance, they have also been cautious purchasers of asset- backed portfolios.
"Banks are big on credit cards and auto loans," explains Paul Jablansky, head of asset-backed research for Salomon Brothers Inc. "The offbeat securitizations are more attractive to insurance companies than to banks."
Raphael Soifer, an analyst with Brown Brothers Harriman & Co., said the reason banks traditionally have bought only mortgage-backed securities and credit card securitizations is because they originate those kinds of loans themselves.
"They put their own originations in the market and buy others' back to improve liquidity and capital," says Mr. Soifer.
Banks use the private placement market to securitize those assets they are not quite comfortable with: computer leases, equipment leases, home equity.
The private market is ideal for small transactions, where it's just not worth it to pay the legal and SEC registration costs that come with a public deal.
The private market, which accounted for some $13 billion in asset-backed issues last year, also allows issuers to move quickly and discreetly.
But the higher yields and lower liquidity associated with private market deals make public issuances more attractive in most cases. "It's better economics to use the public markets," says J.P. Morgan's Mr. Kerner.
And certainly for banks that make money doing securitizations for customers, the small private deals are difficult and less rewarding.
As it is, the large public securitizations only bring in 20 to 30 basis points on the total issue amount in fee income for the bank. That compares to some 600 basis points in commission for underwriting a typical equity transaction.
Still, observers see growth in the securitization market this year. With a strong overall economy, consumer confidence and credit card use should both be on the rise.
And that means more assets will have to come off the books so banks can fund the expected mushrooming of receivables.
Editor's Note: Today American Banker begins three days of coverage of the asset-securitization market.
