The Inter-American Development Bank has cut exposure to asset- and mortgage-backed securities by more than half since the financial crisis, according to CFO Edward Bartholomew
The changes have been made following the crisis, which at one point wiped $1.9 billion off the market value of its assets.
Today, 70% of the assets in the liquidity portfolio mature in less than one year and 90% in less than three. Exposure to asset- and mortgage-backed securities has been cut to under 20%, from more than 40% at the time of the crisis.
“At the time of the crisis, we had to make a decision on how to respond [to price falls] and decided to carry most assets on our portfolio.”
That policy was rewarded in April 2009, which proved a turning point in the markets, Bartholomew noted. The liquidity portfolio sold just $250 million of the securitized assets in 2010 and defaults to date have been very low, at $2.1 million.
Bartholomew admitted that the Bank had more in structured assets than all but one of the other multilateral development banks, which he declined to name. He pointed out that securitized assets were seen as a conservative asset class and that they are highly diversified including between the US and Europe.
The Bank bought the most senior tranches and mostly AAA-rated debt, he added. The problem was systemic risk and not the individual security selection.
The Bank uses agencies as a large plank in decisions. Bartholomew acknowledged that agencies are imperfect, but said: “If you didn’t have agencies, you would need to invent them.” The bank also looks at other indicators such as credit default spreads.
More recent downgrades of sovereigns and banks with government intervention prove that even the best portfolios are not risk free, he noted. The bank has only minimal positions in Portugal and had nothing in Greece, he notes.
The bank does not have to sell paper if it is downgraded, but has a process to review the position: “If prices are impaired it may not be economically advantageous to sell,” Bartholomew said. Today, in addition to the securitized investments, the fund invests 50% in government and agency paper and about 30% in banks.
For 2009 and 2010, total portfolio returns were 4.73% and 3.24%, 3.93% and 2.98% over the benchmark, Libor. “This large outperformance was driven by strong mark-to-market recoveries in ABS and MBS during those years. We have not revised the benchmark post-crisis,” Bartholomew added.