Bank s Motives For Using It, Its Advantages And Risks

Banks can use it as a useful tool to make more loans and to maintain a higher capital level. However there are risks attached with this financial innovation, as securitisation played a role in the financial crisis in 2007 through sub-prime mortgages. This essay will discuss the process of securitisation, bank’s motives for using it, its advantages and the risks. There are three types of securities: Collateralised Debt Obligations (CDO), mortgage backed securities (MBS) and asset based securities (ABS).CDO are a form of security that are asset- backed, they allow banks to group cash- flow generating assets (loans, mortgages and bonds) into a SPV. Investors choose which tranches they want to buy based on their varying risk and returns. MBS†¦show more content†¦The group of assets must have ‘statistical history of losses’ so that the securities can be priced accurately and the risk characteristics can be analysed. With the asset portfolio the terms of each l oan must be fairly similar to minimise the interest rate and maturity risk, features on each loan such as the maturity will need to be assessed (Llewllyn, 1999). Securitisation as a technique of asset and liability management https://books.google.co.uk/books?id=j14ZfoAbhm8Cpg=PA7lpg=PA7dq=asset+pooling+homogeneoussource=blots=1OU58vhsHpsig=jDn16hDjQ41b_DglbHPnDDW5EDwhl=ensa=Xved=0ahUKEwjlkf-ziMHLAhXHvBQKHdK8C-EQ6AEIHzAA#v=onepageq=asset%20pooling%20homogeneousf=false Chapter 18 page 598 Securitisation began in US in 1970s; growth of securitisation picked up in 1990s and continued until 2007. Markets collapsed during 2008 and 2009, crisis displayed weakness in securitisation. Securitisation is a sophisticated process with many partakers involved, this essay will discuss each member before discussing the process. The participants of securitisation include: originator, Special purpose vehicle (SPV) or Structured investment vehicle (SIV), credit enhancer, credit rating agency, trustee, servicer, borrowers, underwriter and investors. The originator is typically a bank that securitises the assets, such as