All statements are correct. Due to reputational concerns, in the context of overall stress conditions, a bank may stand ready to inject credit or liquidity to an SPE or may take the structured assets on its balance sheet from the SPE, which in turn may significantly increase liquidity pressures for a bank itself.
Deteriorating market stress conditions may inhibit a bank’s ability to liquidate assets, without loss, to fulfill its liquidity needs.
During the recent turmoil, banks were forced to park assets on their balance sheets, which they could not securitize due to deteriorating securitization markets conditions.
Ineffective hedge, due to change in basis, can result in significant loss as a result of unprotected decline in underlying asset value giving rise to liquidity concerns.
