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FT: The real reason to worry about bank conduits

(2007-09-09 16:20:40) 下一個
The real reason to worry about bank conduits
Sunday September 9, 10:40 am ETIn a crisis, big numbers can lookfrightening. And amid the current turmoil, there are few figures biggerthan the total assets that the world's banks have parked in off-balancesheet vehicles.

These structures, known as conduits, have become thefocus of the liquidity squeeze roiling the banking sector. Fitch, aratings agency, reckons bank-sponsored conduits hold assets worth about$1,400bn (£693bn).

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Giventhat most of this has in the past been funded by buyers of asset-backedcommercial paper, and given that a large proportion of those investorshave gone on strike and show no sign of returning in the near future,it seems reasonable to ask: could the banking system really absorb allthose assets?

The answer is a qualified "yes". But unwinding the great conduit caper could still have far-reaching economic consequences.

First, the good news. While significant, $1,400bn of conduit exposure is not going to cause the banking system to topple over.

Banksin Europe and the US that have provided back-up facilities to conduits- and are therefore responsible for the assets if they can no longerissue commercial paper - have enough liquidity and capital to absorbthe hit.

Fitch calculates that if the worst were to happen andall the assets in conduits were put back to the banks, the impact wouldknock about 60 basis points off the average bank's Tier One capitalratio. That is uncomfortable but not life-threatening.

Of course,the hit is not evenly distributed. But the real problems have alreadybeen exposed. The two European banks with the biggest exposure toconduits relative to their balance sheets were IKB and Sachsen LB, bothof which have been rescued by the German government.

There arealso good reasons why the effect may be more muted. Some conduits arestill issuing commercial paper, though at higher rates and shortermaturities than before.

Others will never find their way back onto banks' balance sheets. This is particularly true of so-calledmulti-seller conduits, which finance relatively short-term liabilitiessuch as car or credit-card loans. Most of these vehicles can be quicklywound down as the commercial paper matures.

Even so, the processwill be far from painless. Conduits were created to provide cheapfinancing. If banks have to finance those assets for more than a coupleof weeks, profits will be lower than previously expected. And that isbefore taking into account any drop in the value of the assetsthemselves.

Every bank insists that its conduits are filled withhighly-rated paper with minimal exposure to US subprime mortgages. Butit would be surprising if some of the assets did not turn out to beimpaired.

The real cost of unwinding conduits, however, is thatthey will absorb banks' lending capacity, driving up the cost ofborrowing for companies and consumers at just the time when othersources of credit are also drying up. This could turn a liquiditysqueeze into something much more severe.

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