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YOUR BANK’S USE OF ASSET SECURITIZATION AND LOAN SALES AS RISK-MANAGEMENT TOOLS AND FEE INCOME GENERATORS
Chapter 9 describes a number of off-balance-sheet activities (asset-backed securities, loan sales, standby letters of credit, and credit derivatives) that can be used for risk management and fee generation. Some financial institutions have used asset securitization and loan sales to focus on loan brokerage where the institutions (1) make loans, (2) remove the loans from their balance sheets by either securitizing or selling the loans, and then (3) use the cash generated in the transfer to repeat the cycle time and time again. This process can generate income at the time of the loan transfer and over the lives of the loans if the institution continues to service the loans it created and sold or securitized. In this assignment we will R E A L N U M B E R S F O R R E A L B A N K S Continuing Case Assignment for Chapter 9 examine to what degree your bank’s income is generated using this means.
Part One: Gathering the Data For this part, we will visit the FDIC’s Web site located at www4.fdic.gov/sdi/ where you will use SDI to create a four column report of your bank’s information and the peer group information across years. This is familiar because you have been here before. For Report Selection use the pull-down menu to choose Additional Noninterest Income and view this in Percentages of Total Assets. Collect the percentage information for the most recent year-end and the prior year-end and enter in the spread sheet for comparisons with the peer group as illustrated using BB&T as an example.
Extend this portion of the spread sheet to columns F, G, H, and I, where you will calculate each items a percentage
of Total Operating Income (Interest Income plus Noninterest Income). To calculate these ratios from the data you have collected, divide each entry in columns B–E (rows 70–72) by Total Operating Income/Total Assets. Note this is equivalent to Item/ Total Assets Total Assets/Total Operating Income Item/ Total Operating Income. (A little algebra makes life worth living.) For example the formula for cell F70 would be B70/(B34 B38) and the formula for cell I72 would be E72/(E34 + E38).
Part Two: Analyzing the Data for Interpretation
A. Compare the columns of rows 70–72, which have been standardized for size by using the Percentages of Total Assets. Is your BHC involved in loan brokerage and to what degree?
B. Write one or two paragraphs interpreting your data and discussing your bank’s involvement in loan securitization and sales relative to other large institutions (its peer group). How has income from these activities contributed to total operating income? What inferences can you make concerning the potential effects on risk exposure? You could incorporate tables using the Excel spread sheets and reference these in your discussion.