{"id":27418,"date":"2015-03-30T04:41:33","date_gmt":"2015-03-30T04:41:33","guid":{"rendered":"http:\/\/vskills.in\/certification\/blog\/?p=27418"},"modified":"2024-04-03T13:16:04","modified_gmt":"2024-04-03T07:46:04","slug":"securitisation-2","status":"publish","type":"post","link":"https:\/\/www.vskills.in\/certification\/blog\/securitisation-2\/","title":{"rendered":"Securitisation"},"content":{"rendered":"

\"Securitisation\"<\/a><\/p>\n

This involves converting the stream of future income from an asset (such
\nas interest payments on a bank loan) into securities that the bank can sell.
\nSeveral types of securitization have been carried out by banks, but the dominant form at the start of this century has been securities created as
\nCollateralized Mortgage Obligations (CMOs). These had existed since the early
\nThe 1980s, but after the 1990s the value of CMOs created and sold by banks rose
\nfast.
\nCollateralized Mortgage Obligations and similar securities have a particular
\nthe feature whose refinement permitted that growth. They divide the income
\nstreams from the pools of mortgages which back them into different slices or
\ntranches, each of which carries different degrees of risk The highest tranches
\nhave a legal status which enables the holder to bear very low risk; even
\nthough the underlying pool of mortgages may carry a high credit risk, in
\nthe case of default the holders of the most senior tranche have a secure, priority
\nclaim on the stream. If, for example, homeowners default on the mortgages
\nthat is the collateral for the bonds, the lower tranches of bonds lose value
\nfirst, while the highest tranches only bear losses if the total default is greater
\nthen the value of the lower tranches of bonds issued. In other words, the
\nlowest tranche has no more claim than an equity holder in a company has on
\na bankrupt company\u2019s assets; their claim is only against the residual income
\nstream from the pooled mortgages after higher-tranche security holders
\nhave been paid.
\nHigher tranches could be sold by banks to other banks and to investment
\nfunds, which required low-risk assets. Even if the mortgages pooled as
\nbacking for a CMO was mortgages owed by high-risk home buyers \u2013 subprime mortgages \u2013 the highest tranche of the securities created was given
\nthe highest credit rating, Aaa, by credit rating agencies and in that way
\nbecame eligible for purchase by risk-averse investment institutions. The
\nthe crisis has demonstrated that even if such risk transformation was feasible for
\nan individual security or bank, it could actually increase the riskiness of the
\nbanking system as a whole and the apparent security offered to investors by
\nthe highest tranches were not sound.
\nFrom the point of view of the originating bank, securitization transformed
\nthe role of risk management. Instead of giving a loan and holding it to
\nmaturity, with the risk of the debtor defaulting and other risks (including
\nthe risk of full repayment too early), the bank would securitize the assets
\nand sell the security. The important point is that by securitizing loans an
\nindividual bank could sell the risks involved in the underlying loan (although, as the 2007-09 crisis revealed, the risks to the financial system as a
\nwhole might rebind on the individual bank). As a result, banks had less
\nincentive to try to minimize the risk of assets. To put it another way, they
\nbelieved their asset management could permit the origination of more risky
\nloans for, having sold the risk on instead of holding it, they were not obliged
\nto increase their capital. If they had not sold the risk by securitization they
\nwould have had to increase their capital in proportion to the (risk-weighted)
\nloan.<\/p>\n

Click here for government certification in Accounting, Banking & Finance<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

This involves converting the stream of future income from an asset (such as interest payments on a bank loan) into securities that the bank can sell. Several types of securitization have been carried out by banks, but the dominant form at the start of this century has been securities created as Collateralized Mortgage Obligations (CMOs)….<\/p>\n","protected":false},"author":625,"featured_media":27578,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_joinchat":[],"footnotes":""},"categories":[1519],"tags":[2190,2274,2856,909,980],"class_list":["post-27418","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accounting-banking-and-finance","tag-banks","tag-income","tag-mortgage","tag-risk","tag-security"],"acf":[],"yoast_head":"\nSecuritisation - Vskills Blog<\/title>\n<meta name=\"description\" content=\"What is Securitisation? 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