Synthetic Securitization Releases Regulatory Capital
(Made Possible by Technology Solution)
In 1999 Rheinhyp was one of the largest mortgage banks in Germany. However, Rheinhyp would soon suffer from a convergence of difficulties. They faced a rising cost of capital, regulatory constraints on capital deployment and a resulting inability to profitably generate additional revenues.
The volume of commercial mortgages on their balance sheet was not viewed favorably by regulators. They were reaching their lending limit based on the Tier 1 Capital Reserve Requirements under the Basel I world banking agreement. The result was that the bank was constrained from making new loans. Without new loans, Rheinhyp was not profitable enough to generate the return on equity capital (ROE) required by their parent company, Commerzbank.
Collectively, these difficult circumstances placed Rheinhyp management under a great deal of pressure to find answers. To earn the ROE demanded, the bank needed to do more lending, but they could not do so without more Tier 1 capital.
The ability to meet ROE targets was doubly important to senior management, because there was a merger pending. ROE performance would have a significant impact on management assignments in the merged entity. To successfully navigate this challenge it was imperative that Rheinhyp think proactively, creatively and innovatively.
As a result, Rheinhyp assigned an internal banking and technology team the task of identifying solutions and making recommendations. That team has since evolved to become EaseCap Solutions. The spin-off in anticipation of the merger was the team's reward for completing this assigned task successfully and exceeding the goals established at the outset.
The team's tailored solution to the challenge was the development of a fully-funded synthetic securitization - and the technology solution to make it possible. The hedging advantage presented by this solution allowed Rheinhyp to release enough regulatory capital to make loans of more than â‚¬1 billion.
The expanded lending capacity enabled Rheinhyp to meet their ROE targets. This expanded capacity would not have been possible without the technology platform developed by the (future) EaseCap team. That success was instrumental in enabling Commerzbank to successfully merge Rheinhyp with the mortgage banking divisions of Deutschebank and Dresdenerbank. The merged entity became Eurohypo, now the largest mortgage banking firm in Europe.