The Bankwatch

Tracking the consumer evolution of financial services

Northern Rock is back to the securitisation market

In yet another sign that nothing has been learned about banks, NR is back tot the securitisation market. 

Why is this important?  Securitisation allows NR to convert mortgages into cash with some discount for market value including predicted bad debts.  Note that Moodys classify the NR issue as triple A so discount will be reduced.  This is what occurred pre 2008.  Then the mortgages that were included in securitised issues turned out to have less value than Moodys classification, so there were losses that had to be covered by an inadequate capital base. 

In other words securitisation is another form of leverage with all the attendant risks that brings and current regulation for that off balance sheet leverage does not take sufficient account of it in the balance sheet of the issuer, and again, this was one of the major issues in 2008 causing markets to freeze because bank value and ability to support there commitments became an unknown.

Northern Rock returns to selling bonds

The bank on Tuesday said it would sell its first mortgage-backed bonds since its nationalisation in a deal that will also mark a new step in the gradual recovery of the securitisation markets – a key source of bank funding before the crisis.

Executives will hold investor “roadshow” meetings in London and across Europe in the coming fortnight to discuss the bonds, of which it could sell up to £370m.

Basel 3 brings in new regulation over the next few years.  This one particular market entry from NR may not be too big of a deal in and of itself, but the direction is set.  There is no indication that this market re-entry will be accompanied anything other than the new Basel 3 rules (which are future oriented).   Markets have such short memories, and do governments.  NR is owned by the UK government, which probably explains the triple A rating.

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Written by Colin Henderson

March 23, 2011 at 17:59

Posted in Uncategorized

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