In recent years one of the main reasons for the crisis of the Italian banking system is represented by the non-performing loans also known as “impaired loans” or npe loans (non-performing exposures).
Credits deriving from financing and mortgage
These are credits deriving from financing, mortgage or current account opening contracts which the customer is unable to repay in whole or in part to the bank; the slowness of the Italian judicial system leads to collection times that are too long and the imprudent credit policy adopted by some credit institutions makes it in some cases improbable if not impossible to recover the credit.
This situation led to the malfunction of the credit distribution mechanism: the weight of non-performing loans (“npl”) affects the liquidity of the banks and negatively affects their ability to finance investments and grant loans.
Banking institutions have had to set aside reserves to face any losses and in many cases have been forced to write down their receivables; according to the data reported by the Good Finance, the impaired loans of the Italian banks amount to 349 billion USD gross of the write-downs already recorded.
Non-performing loans (“npl”), therefore, represent a large boulder that banks must get rid of; the main instrument used for this purpose was the so-called credit securitization governed in Italy by law no. 130/1999. Thanks to this tool, lenders can get rid of bad loans.
It is a very complex process that can be explained by clarifying these three basic points:
WHAT IT MEANS TO SECURITIZE A CREDIT
Securitizing a credit means transferring it to someone else transforming it into an obligation written on a piece of “paper”, that is a title.
The protagonists of this transaction are three: the seller (originator) which resells the credit thus obtaining the liquidity it needs, the transferee (the vehicle company, better known as SPV, “Special Purpose Vehicle”) which replaces the original creditor in the right to collect the credit, and investors, that is, those who physically lend the money to the special purpose vehicle.
The latter signs in favor of investors ABS (” Asset-Backed Security “) that guarantees them that they will return the money in the medium or long term; these are actual debt securities which attribute the right to receive the repayment of the nominal capital plus interest at maturity. But where does the money needed to repay investors come from? From the only person left unchanged: the initial debtor; the latter pays the installment due and in turn, the vehicle company reimburses the investors.
The originators can be not only banks but also financial institutions and public bodies. The securitization also provides for a transfer of receivables without recourse; that is, the originator is not responsible in the event of default by the debtor.
To this end, a very important role is played by the rating agencies, ie companies that express an opinion on the assigned credits; in particular, the suitability of the securitized portfolio to produce the money necessary to repay the securities is assessed (“rating” literally means evaluation).
The rating agencies assign a score that takes into account various parameters such as the quality of the credits transferred, the nature of the debtor, the type of company assigned to recover the credits. This type of intervention has a cost but provides investors with valuable assistance in the correct assessment of credit risk.
THE BENEFITS OF SECURITIZATION
the main advantage deriving from the securitization transaction is the immediate liquidity that is poured into the bank’s coffers: the loan portfolio is sold against a cash consideration necessary to grant further loans.
The main beneficiaries are private individuals but above all small and medium-sized enterprises ( SMEs ); through the reinvestment of the liquidity obtained from the securitization, the bank increases its profitability and can go back to “banking”: that is, favoring consumption and investments through credit instruments.
Securitization also allows the distribution of risk from the originator to other subjects ( investors ) who are better able to manage it; in this regard, we speak of ” risk transfer “, that is, a risk-sharing tool. The transfer for consideration of credits, therefore, determines the re-use of money in more profitable activities offering benefits to the economic system as a whole.
every securitization involves risks for both the originator and the investors. The former will have to bear significant costs; for example the costs of issuing bonds, those deriving from the request for external guarantees, those of an administrative nature. The investor, to whom the bank’s risk has been transferred, will instead have to deal with the debtor’s possible insolvency.
In this regard, we speak of ” moral hazard “(ie the risk of insolvency of the counterparty); thanks to the possibility of resorting later to securitization, banks tend to invest in risky assets, discharging the risk of external losses.
In fact, it has happened that banks have granted loans to unreliable subjects by reducing their controls on creditworthiness. The economic and financial crisis of recent years is a reflection of these incorrect choices and the use of securitization has favored the creation of a shadow banking system that is not subject to any supervision.