1 Changes with Technology Chapter 7 Securitization Structured

2 Loan Securitization How & why did loan securitization start? • • • Innovation

3 Mechanics of Securitization Structure of a Securitization • • • Sellers Buyers Components

4 Structured Finance Transactions Special Purpose Entity (SPE) or Special Purpose Vehicle (SPV) Established

5 Loan Sales Types of Loan Sales • • Participation Assignment Novation Debt-to-Debt Swaps

6 Internet Banks and Other Financial Institutions How Widespread Are Internet Banks and Other

7 Internet Financial Services Used by Financial Professionals Cash management Investments Foreign exchange Bank

8 Internet Opportunities Strategic Choices for Banks in Using the Internet as a Delivery

9 The Supporting Role of Banks in Business-to-Business E-Commerce Traditional Bank Facilitation of Business

10 Banks’ Emerging Role in E-Commerce Internet Portals or “Supersites” Identify Verification Assistance for

11 ATM and Debit and Changes in the Payments System Rapid Rise of ATM

12 Recent Trends in Technology for Financial Service Firms Increasing IT Spending E-commerce Wireless

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2 Loan Securitization How & why did loan securitization start? • • • Innovation of the 1970 s 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. Copyright © 2004 by Thomson Southwestern All rights reserved.

3 Mechanics of Securitization Structure of a Securitization • • • Sellers Buyers Components ◦ Securities pool ◦ Certain conditions ◦ Sometimes insurance ◦ Recourse vs. non-recourse Copyright © 2004 by Thomson Southwestern All rights reserved.

4 Structured Finance Transactions Special Purpose Entity (SPE) or Special Purpose Vehicle (SPV) Established separately from originating company Asset-Backed Commercial Paper Used as an vehicle for off-balance-sheet lending Structured Project Finance Securitization Used for large public or capital intensive projects Catastrophe-Linked Securities CAT bonds Copyright © 2004 by Thomson Southwestern All rights reserved.

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 Copyright © 2004 by Thomson Southwestern All rights reserved.

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 Copyright © 2004 by Thomson Southwestern All rights reserved.

7 Internet Financial Services Used by Financial Professionals Cash management Investments Foreign exchange Bank loans Letters of credit Insurance Bonds and commercial paper issuance Derivatives/hedging Copyright © 2004 by Thomson Southwestern 86 percent 52 percent 45 percent 39 percent 32 percent 31 percent 29 percent 21 percent All rights reserved.

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 Copyright © 2004 by Thomson Southwestern All rights reserved.

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 Copyright © 2004 by Thomson Southwestern All rights reserved.

10 Banks’ Emerging Role in E-Commerce Internet Portals or “Supersites” Identify Verification Assistance for Small Business Entering into ECommerce Facilitating Business-to-Business E-commerce Issuing Electronic Money and Checks The Integration of the ATM and Internet Networks Copyright © 2004 by Thomson Southwestern All rights reserved.

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 Copyright © 2004 by Thomson Southwestern All rights reserved.