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7-1
Changes with Technology Chapter 7
SecuritizationStructured Financing
Internet BankingFinancial Institutions in E-Commerce
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7-2
Loan Securitization
How & why did loan securitization start?• Innovation of the 1970s• Role of interest rates• Advantages
Government-Sponsored Enterprises (GSEs)• Government National Mortgage Association• Federal Home Loan Mortgage Corporation• Federal National Mortgage Association
Private Sector Securitization (1977)• Certificate of Automobile Receivables• Certificate of Amortizing Revolving Debts etc.
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7-3
Mechanics of Securitization
Structure of a Securitization• Sellers• Buyers• Components◦ Securities pool◦ Certain conditions◦ Sometimes insurance◦ Recourse vs. non-recourse
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7-4
Structured Finance Transactions
Special Purpose Entity (SPE) or Special Purpose Vehicle (SPV)
Established separately from originating company
Asset-Backed Commercial PaperUsed as an vehicle for off-balance-sheet lending
Structured Project Finance SecuritizationUsed for large public or capital intensive projects
Catastrophe-Linked SecuritiesCAT bonds
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7-5
Loan Sales
Types of Loan Sales• Participation• Assignment• Novation• Debt-to-Debt Swaps (Brady Bonds)
Economic Benefits and Reasons for the Rapid Growth in Loan Sales and Securitization Activities
The Enron Scandal Backlash on Security Activities
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7-6
Internet Banks and Other Financial Institutions
How Widespread Are Internet Banks and Other Financial Institutions?
• 50 in 1995
• 14,000 in 2004
• Online Banking Household in the U.S.◦ 300,000 in 1995◦ 28 million in 2002
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7-7
Internet Financial Services Used
by Financial ProfessionalsCash management 86 percentInvestments 52 percentForeign exchange 45 percentBank loans 39 percentLetters of credit 32 percentInsurance 31 percentBonds and commercial
paper issuance 29 percentDerivatives/hedging 21 percent
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7-8
Internet Opportunities
Strategic Choices for Banks in Using the Internet as a Delivery Channel
The Performance of Pure Play Internet Banks
Advantages and Disadvantages to Customer of Pure Internet Banks
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7-9
The Supporting Role of Banks in Business-to-Business E-Commerce
Traditional Bank Facilitation of Business Cash Management
• EDI System
• Automated Clearinghouse System
• Financial EDI
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7-10
Banks’ Emerging Role in E-Commerce
Internet Portals or “Supersites”
Identify Verification
Assistance for Small Business Entering into E-Commerce
Facilitating Business-to-Business E-commerce
Issuing Electronic Money and Checks
The Integration of the ATM and Internet Networks
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7-11
ATM and Debit and Changes in the Payments System
Rapid Rise of ATM and Debit Use Growth in Recent Years• ATM - Annual growth rate of 15.5 percent
from 1996 to 2002• Debit Card Use increase 42 Percent a year
since 1995
Federal Regulator Concerns• Ownership and operations of Non-banks• Pricing and Charges
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7-12
Recent Trends in Technology for Financial Service Firms
Increasing IT Spending
E-commerce
Wireless Banking and Brokerage Services