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Subject 1. Benefits of Securitization for Economies and Financial Markets PDF Download

Securitization repackages relatively simple debt obligations, such as bank loans and consumer loans, into more complex structures. It then uses the cash flows from the pool of debt obligations to pay off the bond created in the process.

Securitization has several benefits:

  • It benefits investors by re-distributing payment risks, enhancing the predictability of payments, diminishing the impact of unexpected changes in payment patterns (such as defaults, prepayments, or payment extensions), helping investors match risk, return and maturity needs, and reducing risk through various credit enhancements.

  • It enables issuers to operate more efficiently on a risk-adjusted basis by removing assets and leading risks from their balance sheets (thereby reducing their leverage), expanding their capacity to originate loans and to secure lower funding costs.

  • It enhances financial market efficiency, improving overall liquidity in the financial system and reducing liquidity risk. Banks can remove assets from their balance sheets, therefore increasing the pool of available capital that can be loaned out. Borrowers can pay lower costs when borrowing.

The end result is lower cost and risk, more liquidity, and improved economic efficiency.

There are risks associated with securitization, such as risks related primarily to the timing of the ABS's cash flows, and risks related to the inherent credit risk of the loans and receivables.

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