Research School of Finance, Actuarial Studies & Statistics

EXAMINATION – ATTACHMENTS
Semester 1 – Supplementary exam, 2022

FINM3006 Financial Intermediation and Debt Markets

Semester 1 - Supplementary, 2022 FINM3006 Financial Intermediation and Debt Markets

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ATTACHMENT 1

ANZ capital ratio trimmed after APRA review

The Australian, 12:00AM June 2, 2017

ANZ’s tier-one capital ratio has been trimmed in line with expectations after the prudential
regulator completed its review of the bank’s mortgage capital model.

As a leading analyst predicted the major banks would increase all mortgage products by
10 basis points to help offset the impact of the bank levy, ANZ said the 26-basis-point
erosion of its capital ratio due to the APRA review translated to an average risk-weight for
its domestic mortgage portfolio of a little over 28.5 per cent.

However, the bank said this was consistent with its 2017 capital management plan and no
capital management action was required.

ANZ also noted there were further capital adjustments to come as a result of the Australian
Prudential Regulation Authority’s interpretation of the “unquestionably strong” requirement
for the sector.

Last year, the major banks submitted their new mortgage capital models to APRA for
approval. The initiative was strongly backed by the second-tier banks because it made
them more competitive.

APRA will release a discussion paper on the issue of becoming unquestionably strong in
about a month, but has indicated that more capital will have to be held against mortgage
portfolios because of the higher risk associated with the banks’ significant housing
exposure.

Chairman Wayne Byres has downplayed the need for any “dramatic” increase in capital.

He has often said the regulator will adopt a suitable timeframe to ensure the benchmark
can be achieved in an “orderly” manner.

Meanwhile, a report by Citi analyst Craig Williams has said the shareholder and customer
impact of the bank levy will be a key part of the investment thesis for the banking sector.

Semester 1 - Supplementary, 2022 FINM3006 Financial Intermediation and Debt Markets

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Mr Williams said he expected the majors to lift interest rates on all mortgage products by
10 basis points to offset the impact of the tax on profitability.

“This is likely to be in addition to the 25 basis points of repricing in owner-occupied,

interest-only mortgages, as well as 50 basis points on investor, interest-only mortgages, as
a tool to counteract APRA’s 30 per cent limit on interest-only lending and to meet higher
mortgage risk-weights,” he said.

Mortgage repricing, he said, had once been a cure-all for declining returns on equity.

The sector had been able to push ungeared returns to 25-year highs, entirely through
mortgage margin expansion in retail banking to partly offset falling leverage. But now,
mortgage repricing had become “largely ineffective” due to competition. In 2015, the sector
had raised about $20 billion in new capital for higher mortgage risk-weights, but seven
rounds of mortgage repricing later net interest margins had continued to drift lower due to
discounting by foreign and micro lenders.

The regulator, as well, had announced two rounds of macro-prudential measures to ease
the property boom by cracking down on investor lending. Finally, the combination of
government and regulatory intervention was likely to intensify competition in an “already
competitive market”.

Mr Williams said it was unlikely that the banks would see an emphasis on returns, in
contrast to a focus on volumes, as the most advantageous approach for shareholders,
particularly in an environment of low credit growth.

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ATTACHMENT 2A

ME Bank 2014 Annual Report

Balance Sheet

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ATTACHMENT 2B

ME Bank 2014 Annual Report

Assets in detail

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ATTACHMENT 2C

ME Bank 2014 Annual Report

Liabilities in detail

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ATTACHMENT 2D

ME Bank Regulatory Disclosures

Capital adequacy

Credit exposures

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ATTACHMENT 3

IFC, EIB, and AFD Support Small Businesses and Mobilize Investment in Middle
East and North Africa (MENA)

Amman, Jordan, May 24, 2013— The International Finance Corporation (IFC), a member
of the World Bank Group, the European Investment Bank (EIB), Agence Française de
Développement (AFD), and the European Commission through the Neighborhood
Investment Facility (NIF) are working together to provide funding for small and medium
enterprises (SME) in the Middle East and North Africa.

IFC is establishing the MENA SME Facility in partnership with the World Bank,
International Financial Institutions and donors. Investments of $150 million from each of
IFC and EIB, $50 million from AFD, and Euro 24 million from the NIF will help establish the
MENA SME Facility, which will expand access to finance for small businesses. IFC will
lead the implementation of the facility, which is expected to help support job creation
across the region.

The facility will mobilize an additional $400 million in investments through risk sharing
arrangements with local banks to support the SME sector. A strategic focus on Morocco,
Tunisia, Egypt, Lebanon, and Jordan will help banks mitigate the risks of an unpredictable
investment climate. It will also help create jobs in countries where youth unemployment is
particularly high. That is especially important in a region that will need to add about 75
million positions over the next decade just keep up with population growth.

“The European Investment Bank is happy to foster this innovative risk-sharing joint
instrument as a response to the Deauville Partnership,” said Philippe de Fontaine Vive,
Vice President of the EIB. “Economic growth led by private sector development remains
the cornerstone of any equitable strategy and job creation in the region. It is also fully in
line with the European Neighborhood and Partnership instrument objective, which above
all encourages investment and private global trade.”

The NIF investment, channeled through the EIB, is the first contribution to the junior
tranche of the facility and is key to the financial balance of the initiative.

Semester 1 - Supplementary, 2022 FINM3006 Financial Intermediation and Debt Markets

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“SMEs are a driving force of economies and by sharing the risk of lending to SMEs with
local banks, the facility will help to improve SME access to finance,” said Hervé Breton,
AFD Director in Amman. “This initiative results from an increased coordination among
development financial institutions active in the region, facilitated by the action of the
European Commission through the NIF.”

Dimitris Tsitsiragos, IFC Vice President for Europe, Central Asia, the Middle East and
North Africa, said, “Banks shy away from lending to SMEs because of the belief that it is
too risky. The SME facility will help provide risk sharing guarantees to financial
intermediaries to help encourage SME financing. This in turn will help to encourage banks
to lend to SMEs and support enterprises that create jobs at the base of the pyramid and
support private sector led growth.”

SMEs in MENA countries represent about 80 percent of all business, and make up close
to 40 percent of employment in some MENA countries. But SMEs in the region suffer from
a severe lack of access to finance, with few business able to secure loans due to a stifling
legal and financial framework. A technical assistance component of the facility in
partnership with the World Bank, is designed to improve the regulatory environment for
small businesses. It also helps banks better understand the benefits of lending to SMEs
and assists them in developing new products, like loans tailored to entrepreneurs with little
collateral.

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ATTACHMENT 4

In a future-flow securitization, a company issues a debt instrument whose repayment of

principal and interest to investors is secured by payments on future receivables the
company expects to generate through its normal course of operation.

Suppose Company A wishes to raise funding today but cannot access credit markets
cheaply. One thing that Company A can do is to securitize its future receivables for goods
and services yet to be sold.

To do so it issues debt that is backed by these future flows. The process is similar but not
identical the securitization process we discussed in class. The process is outlined in
Figure 1 below.

Company A expects to sell goods and services to Customers sometime in the future (step
1) in exchange for future receivables (step 2). However, Company A needs funds today.
So to raise the funds, Company A can place collateral (i.e. the future receivables) in a trust
(step 3) and issue securitized debt backed by this collateral (step 4). The asset backed
securities are then sold to investors and proceeds are returned to Company A (step 5). At
some period in the future, Customers buy goods and services from Company A and
instead of paying company A, payments are collected by the SPV/trust (step 6). The
SPV/trust then uses these payments to pay the principal and interest to the investors (step
7). Finally, any payments collected from customers in excess of required principal and
interest is returned to Company A (step 8).

Semester 1 - Supplementary, 2022 FINM3006 Financial Intermediation and Debt Markets

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 Figure 1

4. Securities created &

6. Future payment of $ for Goods & Services
sold to investors
Future
Customers
SPV/Trust ABS
1. Future
2. Future IOUs
Goods &
(receivables)
Services 7. Principal
and Interest
3. Collateral
= Expected
Future
Company A Receivables
(Originator)

Investors
8. $ Collections of future receivables over principal and interest

5. $ raised from the sale of securities

END OF EXAMINATION

Semester 1 - Supplementary, 2022 FINM3006 Financial Intermediation and Debt Markets

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