Question

What is the benefits of Securitization? And what is the danger of Securitization

Answer 1

Securitization is the process of bundling assets such as mortgages into securities.

Some benefits of securitization are as follows:

i) it offers issuers higher credit rating and lower borrowing costs. Also for issuers securitization may lead to off-balance-sheet treatment.

ii)

iii) Securitization benefits the economy as a whole by connecting financial markets and capital markets and thus reducing intermediation costs. Securitization connects these two markets by converting financial assets into capital market commodities.

iii) Securitization asset classes have shown much higher rating resilience and many investors flock to Securitization because of their 'AAA' credit ratings and because of their believe that they will not loose their money with these investments.

However, some danger of securitization are-

i) Transactions may always not lead to off-balance-sheet treatment. As a result benefit to financial institutions will decline.

ii) The convertion of capital market-financial market creates some risk to the economy. The shift to marketable assets from non marketable assets stretches credit creation which tends to sustain borrowers longer in economic expansion and expose them more in contractions.