Module 63: Fixed-Income Securitisation

Question 1

What is securitisation

Answer 1

Creating various types of asset backed securities

Question 2

What is the process of securitisation

Answer 2

1. Bank originates loans to borrowers
2. Bank Pools loans with similar charactersitics
3. Pool of loans (assets) are transferred to an SPE/SPV
4. SPE issues securities on these assets to investors

Question 3

What does it mean the ABS are backed by securitised assets

Answer 3

Cash flows from the assets (borrower repayments) are used to make interest + principal payments to investors

Question 4

What do ABSs do

Answer 4

Create a link from the borrowers and the investors

Question 5

What are the benefits of securitisation for issuers?

Answer 5

Increased business activites: Banks can lend more than they could if they had to finance the loan with their own balance sheet
Increased profitability: Can make money from the original loan and on selling the assets to the SPE
Lower Capital reserves: Selling the loans to the SPE removes credit risk and reduces its capital reserves
Improved Liquidity: Can use securitization to sell illiquid loan portfolios

Question 6

What are the beenfits of securitisation to investors?

Answer 6

Tailored risk and Return: Securitization allows issuers to create securities with risk/return profiles that align with the needs of investors.
Access: nvestors are able to access the collateral pool without having the specialized resources like loan origination and loan servicing functions
Liquidity: ABSs are liquid securities that can be sold to other investors more easily than the underlying collateral, which allows investors to react more quickly to changes in market conditions than they could if they held the loans directly.

Question 7

Benefits of securitisation to economies and financial markets?

Answer 7

Decreased liquidity risk. ABSs are more liquid than the underlying collateral. Hence, securitization improves liquidity in financial markets.

Improved market efficiency: The greater liquidity of ABSs than the underlying collateral allows investors to set equilibrium prices

Lower financing costs for originators: can provide a source of finance for originators that is lower than the cost of issuing debt or equity directly to investors.

Lower leverage for originators: Securitization allows originators to grow their business without having to increase debt on their balance sheets.

Question 8

What are the risks of ABSs

Answer 8

• Cash flows are unceertain and can vary
• Credit risk is passed through to investors