Asset securitization

Interests in loans and other receivables are packaged, analyzed, and sold as "assetbacked"
securities through the structured process known as asset securitization. From the standpoint of
credit originators, this market enables them to transfer some of the ownership risks to people
who are more eager or capable of managing them. By doing this, originators are able to access
the financing markets at debt ratings that are higher than their overall corporate ratings, giving
them, in general, access to a wider range of funding sources at more beneficial rates. They can
reduce some of the expenses of on-balance-sheet financing and manage any asset-liability
mismatches and credit concentrations by removing the assets and supporting loans from their
balance sheets. The organized process of packaging, underwriting, and selling interests in loans
and other receivables as "asset backed" securities is known as asset securitization. From the
standpoint of credit originators, this market enables them to shift some of the ownership risks to
people or organizations better suited to manage them. By doing so, originators can access the
funding markets at debt ratings higher than their overall corporate ratings, which generally gives
them access to broader funding sources at more favorable rates. They can reduce some of the
expenses of on-balance-sheet financing and manage potential asset-liability mismatches and
credit concentration by removing the assets and supporting loans from their balance sheets.

Background
Asset securitization is influencing the direction of conventional commercial banking in the
future. Banks can allocate capital more effectively, gain access to a variety of affordable funding
sources, and better manage business risks by using the securities markets to finance a percentage
of their loan portfolio.

However, securitization markets present both opportunities and challenges. Indeed, the successes
of nonbank securitizes are forcing banks to adopt some of their practices. Competition from
commercial paper underwriters and captive finance companies has taken a toll on banks’ market
share and profitability in the prime credit and consumer loan businesses. And more traditional
banks are under pressure to use securitization to streamline as much of their credit and
securitizations operations as feasible due to the increased competition within the banking
industry from specialist corporations that rely on it. Bankers and examiners should have a
thorough grasp of securitization's advantages and associated hazards due to the possibility that it
will have such a significant impact on banks and the financial services sector.