The Pros And Cons Of Securitization

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Structured asset securitization is the process through which various types of non-liquid assets such as residential mortgages, account receivables, auto loans and credit card debt obligations are sold to a special purpose vehicle (“SPV”), which uses the pool of assets as collateral for the issuance of securities to investors (Fabozzi, 2013). During an asset securitization issue, one of the central elements is that repayment depends primarily on the principal and interest cash flows from SPV’s underlying assets, and not on the overall financial strength of the parent company or originator (Fabozzi, 2013; Riachi & Schwienbacher, 2015; Vink & Thibeault 2007). According to Vink & Thibeault (2007), securitization issues can be distinguished based on their…show more content…
By achieving “bankruptcy remoteness”, firms commit to more efficient investment decisions in bankruptcy (Ayotte & Gaon, 2010). In addition, this practice together with other credit enhancement mechanisms, generally allow the new securities issued to obtain higher ratings from credit agencies – including risk free levels. A number of studies have concluded that securitization has various positive implications. For instance, some empirical studies show that securitization creates value by increasing liquidity, reducing credit and improving leverage ratios (Amrose, Lacour-Little, & Sanders, 2005). According to Riddiough (2011), and it can alleviate market failure, and increase competition and borrower choice. In their study, Altunbas et al (2009) show how banks’ capacity to supply new loans has been strengthened by the securitization activity. In addition, another advantage of securing assets is that funding costs can be reduced because the securities issued can match better the risk return preferences of investors (Aiyar et al,
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