The Benefits of Securitization in Finance

he benefits of securitization

1.1.1. The interest of securitization for initiators

1.1.1.1. A new method of financing

Financial institutions may decide to securitize in order to lower their needs for equity. Indeed, when a bank lends money, some established prudential rules might impose to immobilize part of the amount loaned. Thus, securitization will enable to release the sum which should have been tied up and the institution will therefore be in a position to invest in another activity. As far as companies are concerned, securitization can be a tool capable of helping them address their immediate liquidity needs. However, these are companies which own assets likely to attract investors’ interest, but a quite specific interest: it is not the ownership of such assets which entices them but rather the recourse they can or might offer, either through their operation or their sale.

1.1.1.2. A risk transfer mechanism

Furthermore, securitization will give the opportunity for the issuer to transfer the risk related to the securitized asset to the pool of investors. As a result, if the portfolio’s quality appears to be poor and generating insufficient cash flows, it is then the investors who will bear the loss incurred. One can therefore easily understand why this is a key factor for the banks which are subject to risk control measures. However, it should be noted that the transfer of risk is not full. Indeed, the assignor of underlying assets will retain what we call the « first risk » affecting the securitized portfolios, namely the risk relating to financial stability and market prices of assets.