Benefits of Securitisation

[VinayB]

Hi @David Harper CFA FRM

One of the listed benefits of Securitisation is the Risk diversification via pooling of assets. However, isn't that benefit available irrespective of Securitisation since all those risk segments are present in Bank's Asset base even prior to securitization.

I am sure I am missing some point here.Please guide.

Thanks,
Vinay

 

[David Harper CFA FRM]

Hi @VinayB I don't know your exact reference, but isn't this listed as a benefit to investors in the securitization (rather than the bank or originator)? From the investor perspective, rather than purchase a specific credit-sensitive asset which can default, they gain the benefits of diversification by purchasing a pool (or purchasing a note which a claim on a pool) of credit-sensitive assets, which is the diversification benefit. This is not to imply necessarily that investor cannot otherwise diversify, only that the securitization offers them diversification (within the tailored note). I think that's what we traditionally mean by "diversification benefit." With respect to the bank or originator, the benefits tend to be (i) monetization and (ii) credit risk transfer (to the investors), however I think you can also argue that securitization indirectly offers the bank diversification benefits by converting balance sheet assets (which might be heavily concentrated in a particular asset type/sector) into cash which can be redeployed to other "diversified" assets. Further, you can argue securitization may allow the bank to diversify its funding sources. I hope that's helpful!

 

[VinayB]

Thank you @David Harper CFA FRM ..This is crystal clear now!

Thanks,
Vinay