The collapse of Dutch consumer lending bank DSB in October 2009 contains valuable lessons for the recovering international securitization market, according to a new report by structured finance advisory firm Bishopsfield Capital Partners.
Issues connected with the legal status of direct debits, borrower notification, commingling and set-off of risk in some of DSB securitizations caused unexpected consequences and risks for noteholders.
The DSB case highlighted that the concept of bankruptcy remoteness requires further practical thought by securitization market participants.
Based on the problems experienced by DSB-originated securitizations, Bishopsfield recommended that ring-fenced foundations should be used to receive collections. Reserve accounts as well as liquidity facilities should also be sized to account for the time needed to implement practical solutions.
Greater attention should also be given to the set-off risk inherent in multi-tiered and multi-product banking relationships — and depositor protection schemes should be analyzed in greater detail.
“It is important for bankers, rating agencies and lawyers to pay greater attention to the practical realities of a bankruptcy, where flexibility is required instead of overly prescriptive arrangements," said Mike Nawas, a partner at Bishopsfield.