An FI funds a $5 million residential mortgage in 2017 by allocating capital and by issuing demand deposits.The mortgage represents a loan-to-value of 70 percent.The demand deposits have a reserve requirement of 10 percent and a deposit insurance premium of 23 basis points. What would have been the capital requirements if the FI had securitized the mortgage?

Question

Quizplus · Accepted Answer

When an FI securitizes a mortgage, it essentially sells the mortgage to another entity. This process removes the mortgage from the FI's balance sheet, thereby eliminating the need for capital to be held against the mortgage. Hence, the capital requirement would be $0.

An FI Funds a $5 Million Residential Mortgage in 2017