What is securitization? Why is it important to banks?
Labels: Exam 2 Question 4
posted by Eschenfelder at 8:15 AM
Money and Banking Spring 2006
The following posts are the questions which appeared on last semester's exams. Students should use the comment sections to answer the questions and respond to the posts of other students.
Thursday, February 22, 2007
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Contributors
2 Comments:
Securitization is a way of turning revenue into upfront cash. Banks pool together a package of loans and assign it to a trust, then sell bonds against the trust. It is important to banks because it raises new funds. Banks would prefer to have the money upfront from selling bonds rather than waiting for their loans to come due because the money upfront can in turn be reinvested.
Securitization involves the transformation of a non-traded financial instrument into a traded security. Banks raise new funds by packaging some of their loans into securities and then selling these securities, which are collateralized by the underlying assets, to investors. In other words, it is a way of turning revenue into up-front cash. Banks pull together a package of loans, sell bonds to a trust, and pay the bondholders. Securitization is important to banks because the sale of assets through securitization is a significant source of funding for banks.
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