Securitisation

Question 1

What is securitization?

Answer 1

Process by which banks [pp; various types of debt e.g. mortgages, auto loans, credit card debt
- allows banks to transform illiquid assets freeing up capital and reducing risk on their balance sheets

Question 2

Flowchart

Answer 2

Origination: Banks originate loans, such as mortgages,
Pooling: These loans are pooled together into a portfolio
Securitization: The pooled loans are transferred to a special purpose vehicle (SPV) which issues securities backed by the loan portfolio
- Sale: These securities are sold to investors
- Servicing: A servicer collects payments from the borrowers and distributes them to the investors

Question 3

Securitization Advantages

Answer 3

• Enhances liquidity by converting illiquid assets into cash
• This process helps banks manage risks by transferring credit risk
• diversification
• attracts many different types of investors due to varying risks

Question 4

Securitization Disadvantages

Answer 4

-Relaxes loan screening standards
- Adverse selections
- Less motivation to monitor borrowers
- moral hazard
- poorly managed securitization = 2008 financial crisis

Question 5

What is synthetic securitization?

Answer 5

• credit derivates to transfer credit risk without selling assets
• Bank uses credit default swap to hedge the risk of a loan portfolio
• complex