1. Copyright © 2004 by Thomson Southwestern All rights reserved. 7-1 Changes with Technology Chapter 7 Securitization Structured Financing Internet Banking Financial Institutions in E-Commerce

2. Copyright © 2004 by Thomson Southwestern All rights reserved. 7-2 Loan Securitization How & why did loan securitization start? Innovation of the 1970s Role of interest rates Advantages Government-Sponsored Enterprises (GSEs) Government National Mortgage Association Federal Home Loan Mortgage Corporation Federal National Mortgage Association Private Sector Securitization (1977) Certificate of Automobile Receivables Certificate of Amortizing Revolving Debts etc.

3. Copyright © 2004 by Thomson Southwestern All rights reserved. 7-3 Mechanics of Securitization Structure of a Securitization Sellers Buyers Components ◦ Securities pool ◦ Certain conditions ◦ Sometimes insurance ◦ Recourse vs. non-recourse

4. Copyright © 2004 by Thomson Southwestern All rights reserved. 7-4 Structured Finance Transactions Special Purpose Entity (SPE) or Special Purpose Vehicle (SPV) Established separately from originating company Asset-Backed Commercial Paper Used as an vehicle for off-balance-sheet lending Structured Project Finance Securitization Used for large public or capital intensive projects Catastrophe-Linked Securities CAT bonds

5. Copyright © 2004 by Thomson Southwestern All rights reserved. 7-5 Loan Sales Types of Loan Sales Participation Assignment Novation Debt-to-Debt Swaps (Brady Bonds) Economic Benefits and Reasons for the Rapid Growth in Loan Sales and Securitization Activities The Enron Scandal Backlash on Security Activities

6. Copyright © 2004 by Thomson Southwestern All rights reserved. 7-6 Internet Banks and Other Financial Institutions How Widespread Are Internet Banks and Other Financial Institutions? 50 in 1995 14,000 in 2004 Online Banking Household in the U.S. ◦ 300,000 in 1995 ◦ 28 million in 2002

7. Copyright © 2004 by Thomson Southwestern All rights reserved. 7-7 Internet Financial Services Used by Financial Professionals Cash management 86 percent Investments 52 percent Foreign exchange 45 percent Bank loans 39 percent Letters of credit 32 percent Insurance 31 percent Bonds and commercial paper issuance 29 percent Derivatives/hedging 21 percent

8. Copyright © 2004 by Thomson Southwestern All rights reserved. 7-8 Internet Opportunities Strategic Choices for Banks in Using the Internet as a Delivery Channel The Performance of Pure Play Internet Banks Advantages and Disadvantages to Customer of Pure Internet Banks

9. Copyright © 2004 by Thomson Southwestern All rights reserved. 7-9 The Supporting Role of Banks in Business-to-Business E-Commerce Traditional Bank Facilitation of Business Cash Management EDI System Automated Clearinghouse System Financial EDI

10. Copyright © 2004 by Thomson Southwestern All rights reserved. 7-10 Banks’ Emerging Role in E-Commerce Internet Portals or “Supersites” Identify Verification Assistance for Small Business Entering into E- Commerce Facilitating Business-to-Business E-commerce Issuing Electronic Money and Checks The Integration of the ATM and Internet Networks

11. Copyright © 2004 by Thomson Southwestern All rights reserved. 7-11 ATM and Debit and Changes in the Payments System Rapid Rise of ATM and Debit Use Growth in Recent Years ATM - Annual growth rate of 15.5 percent from 1996 to 2002 Debit Card Use increase 42 Percent a year since 1995 Federal Regulator Concerns Ownership and operations of Non-banks Pricing and Charges

12. Copyright © 2004 by Thomson Southwestern All rights reserved. 7-12 Recent Trends in Technology for Financial Service Firms Increasing IT Spending E-commerce Wireless Banking and Brokerage Services