Why would you expect securitisation to take place only in highly developed capital markets?

Why would you expect securitisation to take place only in highly developed capital markets?

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Expert Solution

Following factors are prerequisite for a good securitization market:

Strong legal and regulatory framework:

Securitization involves various stakeholders including issuer, investor, trusts, guarantors etc. Each of them has rights or obligation on future cashflow in different ways.
Further, securitization adds several layers on the loan contracts by selling its cashflow. So, risk on the actual cashflow be hidden. In order to address these concerns, a robust legal and regulatory framework is necessary. Usually, developed countries have a sound legal enforcement practices and regulatory structure and developing countries lacks it.

Existence of secondary debt market:

Developed economies used to have an established secondary debt market. A secondary market provides an easy entry and exit for investors in securitization transaction. Further, it brings interest of various participants such as state-owned banks, provided funds etc. Usually, developing economies lacks liquid secondary debt market.

So, due to above factors securitization transaction is prevalent in developed country.

jeff jeffy answered 1 year ago

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