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Securitisation of Bank Loans and Reasons Why Banks Securitise Some of its Loans - Essay Example
Author : dsimonis
Finance & Accounting
Pages 8 (2008 words)
SECURITISATION OF BANK LOANS AND REASONS WHY BANKS SECURITISE SOME OF ITS LOANS Institution’s Date: Introduction According to Uzun and Webb (2007, p. 11), ssecuritisation involves the transformation of illiquid assets into liquid assets and the practices has been applied in USA ever since 1980s but started being used in the European Union at the beginning of 1990s…
11) further describe securitisation as a financial practice which involves pooling together the various types of contractual debts for instance commercial and residential mortgages, automobile loans or credit card liability obligations and marketing the combined debt as bonds, securities or collateralized mortgage obligation to various investors. The principal and interests accruing from the debt and the underlying security is paid to the investors on regular basis. Securitisation has also been defined by (Samantha, 2005, p. 1) as the process of converting the existing assets or future cash flows into marketable securities. Converting existing assets to marketable securities is known as asset-backed securitisation while securities supported by the mortgage receivable are known as mortgage-backed securities (MBI) (Samantha, 2005, p. 1). Securitisation can help improve the liquidity, reduce risks associated with credit and interest rates; supplement fee income and boost the leverage ratios. Despite these gains, some financial institutions are reluctant to securitize their loans given the disadvantages of this practice. This paper will first assess the process of securitisation and then make a study into the reasons why banks securitize their loans (Altunbas, Gambacorta and Marques, 2007, p. ...