Early Commentary on Canadian ABCP

The article Developments and Issues in the Canadian Market for Asset-Backed Commercial Paper, published in the Bank of Canada Financial System Review in 2003 is most interesting. broken link fixed 2019-5-22

Because the assets are typically of longer maturity than the ABCP financing them, some sort of liquidity buffer is required to protect against rollover risk and timing mismatches. Hence, ABCP issuance programs purchase liquidity protection. At a minimum, such protection must safeguard against what the Office of the Superintendent of Financial Institutions (OSFI) calls a “general market disruption,” which is defined by market participants as a situation in which “not a single dollar of corporate or assetbacked commercial paper can be placed in the market—at any price.”9

A general market disruption is a highly unlikely event, and Canadian liquidity facilities, which do not cover anything beyond this minimum criterion, have never been triggered. According to OSFI (1994), a bank providing liquidity protection that embeds protection against other risks, like credit risk, would incur regulatory capital charges that, when passed on to the issuance program, could make the ABCP less economical.

U.S. regulatory charges have, however, been lighter on liquidity facilities that offer some degree of credit protection. Hence, liquidity enhancement for U.S. ABCP programs typically covers more than just general market disruptions, offering some elements of protection against credit risk.10

I was happy to find a definitive reference to the capital requirement for liquidity support – it is OSFI guideline B5:

An eligible liquidity facility that is in compliance with the conditions and scenarios described in sections 4.3.1, 4.3.2, and 4.3.3 is subject to the following capital treatment:
• for a facility that is available in the event of a general market disruption, a 0% credit conversion factor (CCF) applies;
• for a facility with an original maturity of one year or less or that is unconditionally cancellable at any time without prior notice, a 10% CCF applies; or
• for a facility with an original maturity of more than one year, a 50% CCF applies

Update, 2007-10-4: I note that the capitalization rules were mentioned by Dodge in a September, 2007 speech:

Another issue related to securitization concerns the capitalization of banks. If banks are moving securitized loans off their balance sheets, but still providing liquidity guarantees for these securities, how much capital should they be required to set aside? The authorities at the Basel Committee may need to revisit this issue in light of recent experiences.

2 Responses to “Early Commentary on Canadian ABCP”

  1. […] This rule appears to be similar to the Canadian requirements. There was a note in the source for this post that changes in the international rules were expected, but that these might not impact Canada. I will be checking to see whether the relevant section of the Fed manual was changed in the intervening period. […]

  2. […] Early Commentary on Canadian ABCP […]

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