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 Topics
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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