HSBC to Bring Some SIVs on to its Balance Sheet
HSBC is planning to bring about $45B worth of SIVs on to its balance sheet and pump about $35B into the SIVs. This is being done in the hope of creating some level of liquidity for the instruments. From Market Watch:
HSBC Holdings on Monday said it would move two of its structured investment vehicles onto its balance sheet and provide up to $35 billion in funding, saying it doesn't expect a near-term resolution of the funding problems faced by the vehicles that it and other banks hold.
In a structured investment vehicle, short-term commercial paper is issued, with the bank then re-investing the proceeds in higher-yielding, and longer-maturity debt. Because of the spillover from the U.S. subprime mortgage lending crisis, investors have been reluctant to buy the commercial paper that these vehicles depend on.
HSBC said it's moving Cullinan Finance and Asscher Finance, the two SIVs, onto its balance sheet to prevent a forced liquidation of what it called "high-quality assets."
The SIVs had funding through the end of the year, and the Asscher SIV was funded through April 2008, HSBC said. It's providing up to $35 billion in funding, and its balance sheet will expand by $45 billion.
But the banking giant insists earnings won't be materially impacted, because existing investors will continue to bear all economic risk from actual losses.
"We believe that HSBC's actions will set a benchmark and restore a degree of confidence to the SIV sector, while providing a specific solution to address the challenges faced by investors in Cullinan and Asscher, the two SIVs managed by HSBC," the bank said in a statement.
And it comes as Citigroup is under pressure in some quarters to move $41 billion in off-balance sheet securities onto its balance sheet, according to a report in The Wall Street Journal on Monday.
Those who say Citi needs to put these securities, known as collateralized debt obligations, onto its balance sheet argue that because Citi acted over the summer to backstop some of them, its relationship with them changed, prompting a reconsideration event, the report said. Citi says its accounting practices are in line with applicable rules and regulations.
HSBC's move also comes as the European Central Bank on Friday said it had seen "re-emerging tensions in the euro money markets."
The ECB said Friday it would step up the pace of injections into the euro-area banking systems. The U.S. Federal Reserve also is planning further increases in repurchase agreements, better known as repos, the Journal added Monday, citing a person familiar with the situation.
Three-month euro-area inter-bank lending rates rose to 4.71% on Friday -- more than a half-point over the ECB's base rate of 4%. Similar spreads are seen in sterling- and dollar-denominated LIBOR rates. The market for covered bonds -- which are similar to mortgage-backed securities, but kept on issuers' balance sheets -- also has dried up, causing some planned issues to be postponed