The practice of issuing MBS and holding it on book provides another outlet and diversified use for a credit union's securitization activity. Although the Bank of Canada rolled out numerous other liquidity programs last spring (e.g., bond buyback, Standing Term Liquidity Facility), most of these apply to the centrals, whereas the CMHC Securitization liquidity programs offer direct access for credit unions. In both the 2008 Financial Crisis and the COVID-19 crisis last spring, the Bank of Canada used the CMHC programs as a way to inject further liquidity into the banking sector through the Insured Mortgage Purchase Program (IMPP) as well as through weekly CMB purchases. Significant support from CMHC and the federal government during times of crisis
This alleviates stress on the credit union system and provides a more robust liquidity management strategy. For credit unions, liquidity generated from CMHC securitization is one of the few areas in which they can gain access to the larger market. Throughout the 2008 financial crisis as well as the market panic we observed early last year, the CMHC Securitization program remained an area of strength and a significant source of liquidity. What are the benefits?Īccess to liquidity outside of the credit union system during market events We're seeing more credit unions take note of this approach. Issuers holding their own MBS as one piece of a diversified HQLA portfolio, balanced with other third-party MBS as well as other Level 1 Assets (Government of Canada Bonds, provincial bonds, etc.), is often beneficial and has been widely adopted. This allows for an additional outlet for issuances, while boosting the overall HQLA portfolio yield. It is industry standard for OSFI-regulated entities to issue and hold their own NHA MBS, as the yield on these securities is the underlying yield of the mortgages, rather than the coupon of the MBS. To meet the Liquidity Coverage Ratio (LCR) requirement, OSFI-regulated entities often issue or acquire NHA MBS to hold on balance sheet as a portion of the overall HQLA asset mix. Therefore, NHA MBS benefit from the government's credit rating regardless of issuer, as all NHA MBS issued bear a rating of AAA.
HIGH QUALITY LIQUID ASSETS FULL
The NHA MBS program is a government-sponsored program and receives the full backing of the federal government. National Housing Act Mortgage-Backed Securities (NHA MBS), regardless of the Issuer, are considered a Level 1 Asset (OSFI). Using MBS as HQLA is a useful tool to ensure quick access to liquidity, regardless of regulatory requirements. While liquidity levels are high, so is uncertainty as to how or when liquidity may run off.This strategy allows for some enhancement to the yield in the HQLA portfolio, which helps to combat margin compression. Financial institutions are looking for additional yield at a time when margins are compressed.Additionally, we're seeing an increased use of holding MBS as HQLA nationwide.
HIGH QUALITY LIQUID ASSETS HOW TO
With the changes to the Mandatory Liquidity Pool (MLP) under C1, many Ontario and BC credit unions are looking into managing their own HQLA portfolios and how to use MBS, including MBS they issue themselves.
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