Why Is Securitization Preferred?

Why is Securitization preferred?
Posted 1 year ago  | 

1 Answer(s)

Prateek Kumar

Securitisation is one way in which a company might go about financing its assets. There are generally the following reasons why companies consider securitisation:

1. Improve capital returns: To improve their return on capital, since securitisation normally requires less capital to support it than traditional on-balance sheet funding;

2. Raise finance: To raise finance when other forms of finance are unavailable (in a recession Banks are often unwilling to lend - and during a boom, Banks often cannot keep up with the demand for funds);

3. Better return on assets: Securitisation can be a cheap source of funds, but the attractiveness of securitisation for this reason depends primarily on the costs associated with alternative funding sources; 4. Diversify portfolio: To diversify the sources of funding which can be accessed, so that dependence upon Banking or retail sources of funds is reduced;

5. To lower risk: To reduce credit exposure to particular assets for instance, if a particular class of lending becomes large in relation to the balance sheet as a whole, then securitisation can remove some of the assets from the balance sheet;

6. Manage Mortgage Assets: To match-fund certain classes of asset - mortgage assets are technically 25 year assets, a proportion of which should be funded with long term finance; securitisation normally offers the ability to raise finance with a longer maturity than is available in other funding markets;

7. Benefits: To achieve a regulatory advantage, since securitisation normally removes certain risks which can cause regulators some concern, there can be a beneficial result in terms of the availability of certain forms of finance (for example, in the UK building societies consider securitisation as a means of managing the restriction on their wholesale funding abilities).