- CFA Exams
- 2024 Level II
- Topic 6. Fixed Income
- Learning Module 45. Introduction to Asset-Backed Securities
- Subject 1. Benefits of Securitization for Economies and Financial Markets
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 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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