Subject 1. Benefits of Securitization for Economies and Financial Markets
#basic-concepts #cfa #cfa-level-1 #fixed-income #reading-55-introduction-to-asset-backed-securities
Securitization repackages relatively simple debt obligations, such as bank loans and consumer loans, into more complex structures. It then uses the cash flows from the pool of debt obligations to pay off the bond created in the process.
Securitization has several benefits:
- Investors can have direct access to mortgages and portfolios of receivable that would be unattainable if all the financing were performed through banks.
- Banks can remove assets from their balance sheets, therefore increasing the pool of available capital that can be loaned out.
- Borrowers can pay lower costs when borrowing.
The end result is lower cost and risk, more liquidity, and improved economic efficiency.
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