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Description of Securitization. Explanation.




Definition Securitization. Description.

Securitization is a financial technique that pools assets together by turning future cash flows into tradable, bond-like securities. Creating such asset-backed securities became a lucrative business for financial firms during the 1990s.

Benefits of Securitization:

  • Businesses ("Issuers") can immediately realize the value of a cash-producing asset and get instant access to money for which they would otherwise have to wait months or years, and they can shed some of the risk that their expected revenue will not materialize.

  • By selling securitized loans, investment banks are able to finance their customers without tying up large amounts of capital.

  • Investors can hold a new sort of asset, less risky than unsecured bonds, giving them the risk-reducing benefit of diversification.

However there is always a risk that the future cash flows underlying the securities may flow earlier or later than promised, or not at all.

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