Canada: Securitization Vehicles - Is IFRS The End Of The Road?

Last Updated: August 16 2011
Article by Andy Kenins, Dilshad Hassen and Peter Hatges

As confidence in these vehicles remains low for investors and IFRS eliminates some of their biggest benefits for banks, the industry needs to mitigate the impact by developing a new and more diversified range of financing sources.

One of the biggest changes in banking and credit lending over the past 20 years has been the growing proportion of bank-originated loans sold to investors in securitization vehicles. Banks have developed a host of investment vehicles to accomplish loan securitizations—asset-backed commercial paper, mortgage-backed securities, and collateralized loan or debt obligations, to name a few.

Trillions of dollars in loans have been securitized through these vehicles, allowing banks to reduce their regulatory capital requirements and manage their exposure to any one borrower. Banks have also marketed these vehicles to corporate clients, in single- or multi-seller form, creating a means for companies to securitize customer accounts and lease receivables, monetize high-quality assets, and improve how they manage their balance sheets and lending ratios.

These conduit structures have allowed the banks to generate fees for structuring and managing the vehicles, along with liquidity and commitment fees. These lucrative revenue streams have come to represent a significant part of many banking businesses.

Investor interest fails to rebound

However, securitization activity slowed to a virtual halt in 2008 as the credit crunch swept the globe and investors lost confidence in mortgage- and asset-backed securities. As the debt capital markets recover and market liquidity improves, investor interest in certain securitization vehicles remains slim. To the extent that IFRS has eliminated some benefits of securitizing assets through these investment vehicles, banks have lost a lever for optimizing regulatory capital and managing exposure. And to the extent their corporate clients begin to shy away from these structures, banks also stand to lose a key source of revenue.

IFRS reporting puts pressure on asset-to-capital ratios

Reporting debt securitizations on balance sheet under IFRS will adversely affect financial results and could diminish the financial benefits of future issuances. IFRS reporting of these vehicles will put pressure on banks' asset-to-capital ratios and limit their ability to undertake such transactions in the future. Risk-based capital ratios are less affected, muting the impact for larger banks whose assets-to-capital ratios are less of a constraint.

IFRS looks to transfers of risks and rewards

Under Canadian GAAP, securitization transactions could achieve derecognition and off-balance sheet treatment for various assets such as loans and mortgages where the bank or corporation is considered to have transferred control over the assets. But under IFRS, derecognition is more difficult to achieve because it is based on whether there has been a substantial transfer of risks and rewards as well as a transfer of control.

If the assessment of the transfer of risks and rewards is inconclusive (where some but not substantially all risks are retained), control and the extent of continuing involvement must be assessed. Under Canadian GAAP, the transfer of risks and rewards does not factor into the assessment. But in many circumstances, the IFRS assessment must go beyond just qualitative considerations to also examine quantitative measures. Banks and corporations transferring assets to investment vehicles must compare who is exposed to the risk of loss, and entitled to the rewards, before and after the transfer. Where substantially all the risks and rewards of the assets are retained by the transferor, derecognition of the entire asset under IFRS is not permitted.

Typical Canadian structures used to facilitate securitizations have required the transferor to retain a substantial exposure to the risks and rewards. The requirement served as a form of credit enhancement to support asset-backed security ratings and limit the exposure of investors and sponsoring banks. Under IFRS, these mechanisms prevent derecognition. In certain investment vehicles, a third party or the transferee assumes some, if not substantially all, the risks and rewards of the assets. Where the control criteria are also met, such vehicles offer some flexibility for achieving derecognition.

In light of the risks and rewards consideration, most existing Canadian securitization vehicles would not qualify for de-recognition under IFRS. The underlying assets would therefore need to be recorded or remain on the transferor's balance sheet.

For example, securitization transactions in which the transferor gives collateral or guarantees as a first loss against credit losses inherent in the securitized portfolio of assets may not meet the IFRS de-recognition standard where the first loss level is sufficient to cover substantially all the expected risks inherent in the assets. Increased capital adequacy requirements, lower returns on assets, and deferrals of gains and losses on such securitization transactions will result. Additionally, recognizing the transferred assets back on the balance sheet with a corresponding obligation may also strain corporations' balance sheet ratios. To avoid going offside, many corporations have had to renegotiate loan covenants and other metrics with their banking partners, lenders and other stakeholders.

Smaller institutions most affected

Smaller financial institutions with large amounts of securitizations will be most affected by the change to IFRS due to the adverse impact on their asset-to-capital ratios. The Office of the Superintendent of Financial Institutions is considering a multitude of requests from smaller institutions to increase their assigned ratios. While such relief may ultimately be provided, new assigned ratios will not likely increase beyond the existing maximums (e.g., 23:1) for larger institutions.

Institutions that take part in the Canada Mortgage Bond program are particularly affected. The program is designed to transfer interest rate and prepayment risk on underlying mortgage-backed securities back to the originator through a total return swap, also known as a "seller swap". Depending on the mortgage-backed security pools and specific terms and conditions, many institutions in Canada need to recognize the mortgages underpinning the mortgage-backed securities on balance sheet, which can significantly strain their capital ratios.

Mitigating the impact

As the implications of IFRS on securitizations take hold, there are a number of steps that banks should take to mitigate the impact:

  • Assess the impact of transactions that would fail derecognition. Consider the potential effect on capital adequacy and other ratios such as return on assets.
  • Work with investors, originators and legal counsel to develop new securitization structures that meet IFRS de-recognition requirements. In principle, to derecognize financial assets on transfer, the transferee must have given up exposure to substantially all the risks and rewards of owning the assets. Retained interests designed to cover first loss exposure, cash reserve accounts and other mechanisms designed to have the transferor retain this exposure in substance (for example, to enhance or obtain a specific credit rating) would violate this principle and need to be amended or addressed.
  • Work with corporate clients to assess whether bank-sponsored structures meet the IFRS derecognition criteria. Corporations can expect to pay a premium to have the bank sponsor of an investment vehicle or a third party investor assume first loss exposure over the transferred assets. Similarly from a sponsoring bank's perspective, where the transferor or originator of the assets sold into the investment vehicle do not assume the first loss exposure, the bank would need to accept the risk of either assuming this exposure itself or the exposure of whoever else assumes it.
  • Assess the financial impact of compromising credit ratings for securitized pools in exchange for achieving the desired capital and accounting result of de-recognition.
  • Adjust internal processes and systems for accounting for these transactions, for example, to change how transfers of risk and rewards are measured and documented.
  • Create an assessment model that incorporates the full cost benefit analysis of undertaking securitization transactions. Even if they do not meet the de- recognition norms, such transactions could have benefits as a funding alternative to raising deposits.

As for Canada Mortgage Board program transactions, where a bank transfers mortgage-backed securities under the program that do not qualify for derecognition, recognizing the underlying mortgages on the balance sheet, along with the corresponding secured financing obligations, and derecognizing the seller swap creates more challenges. Depending on how or if the bank hedged the interest rate and prepayment risks associated with the mortgage-backed securities and the program, accounting under IFRS exposes the economic hedge, adding to the income statement's volatility. Fortunately, the IFRS rules on portfolio hedging are more accommodating (with macro or portfolio hedging permissible) and so banks can apply hedge accounting to mitigate income statement volatility in some cases.

Looking ahead, while the new IFRS rules make derecognition of financial assets harder to achieve, they do not make it impossible. Canadian banks will therefore need to work with their clients and investors to develop a diversified range of appropriate financing structures and sources.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions