BSP officials caution banks on ABS issues

Bangko Sentral ng Pilipinas. INQUIRER FILE PHOTO

Asset-backed securities (ABS) are set to help deepen the country’s financial markets and give investors more options on where to put their money.

Banks, however, should be careful in securitizing receivables, the Bangko Sentral ng Pilipinas (BSP) said, stressing the need for prudent underwriting practices to be upheld to ensure the stability of financial markets.

“It’s all about the quality of the way it was put together. You have to look at the underlying asset of the security. If it’s well-underwritten, then there’s no problem,” BSP Deputy Governor Nestor A. Espenilla Jr. said in an interview.

Securitizing loan receivables and selling these to investors pass on the risk of defaults to holder of these IOUs, although investors also stand to get higher returns from these securities.

In the United States, it was these types of instruments that led to the 2008 global financial crisis. Sub-prime mortgages were packaged and sold to investors. When borrowers started defaulting, investors were left empty-handed, causing tightness in liquidity that eventually affected the real economy.

Espenilla, however, said securities of the sort were not necessarily bad. He said issuing these types of securities were an “efficient” way for banks to manage their liquidity levels, allowing them to relend proceeds from these issuances to new clients.

Deputy Governor Diwa C. Guinigundo, for his part, said these securities helped provide more financial instruments for investors.

“That’s part of developing domestic capital markets,” he said.

BSP officials’ comments followed thrift bank BPI Family Bank’s plan to pioneer auto loan securitization in the country by unloading part of its auto loan portfolio into a special purpose trust (SPT), which will, in turn, sell P5 billion in retail bonds backed by these receivables.

BPI Family, which will sell some auto loans to the newly created BPIFSB Auto Dream Bonds Special Purpose Trust, has been planning to launch the asset-backed securities (ABS) offering by late September or October.

The issuance of these securities is still subject to the BSP’s approval. Both Guinigundo and Espenilla declined to comment on the BPI transaction.