Impact of Securitization on Canadian Financial Market and Global Financial Crisis

Running head: FINANCE
Finance
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1FINANCE
Table of Contents
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................2
Answer 3....................................................................................................................................3
Answer 4....................................................................................................................................4
Reference....................................................................................................................................5

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Answer 1
Moral hazard is practice of the unscrupulous lenders lenders involved in passing the
bad loans to various other market participants in addition to the unsuspecting small scale
investors at the closing for the chain.
Securitization is the tradition of parcelling the loan together into the security. The
securitization of the subprime mortgages was the focal point for the revulsion with the
business practices of bank before the crush in Canadian market.
In case of Canadian financial market, it has been found that instead of passing the bad
loans to the outside of banking system, the securitization worked for concentrating risks in
the banking sector itself. Further, banks were using the securitization process as a means to
borrow for expanding the lending and thereby increasing the leverage. Unlike the traditional
bank that depends upon the retail deposits for financing the lending the securitisation process
opened up the new sources for funding through tapping the new creditors. Hence, it can be
said that securitization is the sources of risk for the Canadian financial market (Schwarcz,
2018).
Answer 2
Securitization was one of the major causes for global financial crisis. Under the
securitization process the firm pools the assets and issues the securities with the right of
paying backed by asset pools. Banks in Canada used this process on large scale.
Securitization of the loans has its impact on various aspects as follows –
a. Credit risk – for most of the bank credit risk was the most crucial risk and loans were
the most obvious and largest sources of the credit risk. Hence, credit risk from the
loans has most important effect on the risk appetite of bank. However, the credit risk
exposure from the loans determines remaining risk appetite from various other assets.
If the bank has high exposure towards credit risk from the loans, it will not be willing
or less willing for taking the additional risk.
b. Capital adequacy ratio – before big financial crisis, the commentators worried about
the significant deficit is US account and raised the concerns regarding US dollar
depreciation. It further parallel draws the emerging market experience regarding