Asset Securitization in Banking and Finance: Benefits, Risks, and Financial Crises

Economic of Banking and Finance
Part a
Asset securitization is the process where the loans and receivables are underwritten and sold
as ‘asset backed’ securities. Asset securitisation is basically pooling the asset and then
creating a more or less instrument for investment like mortgage pass-through security. This
also called as the replacement of the non-marketable loans and the cash flows which are
issued in the capital markets with negotiable securities.
Asset securitisation is an arrangement which is comprised of putting together a claim on a
particular asset which is then sold in the financial market as negotiable security. Asset
securitisation is mainly done by financial institutions of commercial papers, car loans,
mortgages, credit card receivables and export credits (Obay, 2014).
Part b
The major benefits of the securitisation to the investors is that with the rating given by the
credit rating agencies the investors will get a surety that they will not lose their money with
these investments.
The benefits of securitisation to investors:
 Securitisation is a structured finance instrument that is more closely assigned to
investor’s needs.
 The investor will get a cover by investing into these securities as the default cases are
very low.
 The recovery rate of defaulted tranches is very high then the rate of corporate bonds.
 Investors can freely invest in the instruments which suits their investment policy as
best ones.
 All the more the experience shared by the investors on international level is quite
good with very low cases of default (Gatti, 2013).
Part c
Risk involved in investing in securitisation:
Credit/ Default: This is the risk in which the borrower is unable to pay the interest obligations
on time. There is default of payment at the end of the borrower of the instrument.