Analysis of non-compliant loans in German synthetic mortgage-backed securities transactions: Performance and regulatory effects

Over the term of a securitisation transaction, the concept of non-compliance enables a securitising bank to classify a securitised loan as materially non-compliant with transaction-specific, contractually agreed requirements. Such a loan becomes unqualified for loss allocation to the account of the protection sellers. Therefore, non-compliant loans can directly affect transaction performance and the extent of risk transfer that is actually achieved with the transaction. The concept of non-compliance is incorporated in many securitisations independent of the underlying assets or structure. In Germany, there are currently no specific regulatory provisions in place regarding this concept. However, a bank can use discretion when classifying a loan as non-compliant and could thus report non-compliant loans strategically. This hypothesis is tested based on a unique data set. The potential regulatory effects associated with such conduct are elaborated. Suggestions are made for a more adequate regulatory treatment of non-compliant loans.

Gaby Trinkaus, CFA, has been working in the securitisation services team of a large accounting firm in Germany since April 2004. Her responsibilities mainly cover assurance and advisory services for originators, investors and sponsors in synthetic and true sale securitisations with regard to regulatory issues (German solvency directive, large exposure requirements), trustee services, portfolio and deal analysis (e. g. stratification tables and weighted average lives). She leads and conducts realised loss verifications, asset audits and file due diligences for performing and non-performing loans. Moreover, she performs compliance checks on transaction- and loan-level. From mid-2008 until 2010 she was a research fellow at the Institute of Banking and Banking Law, University of Cologne, Germany. In 2010 she received her PhD in business administration.