Securitisation is a financial structure that generates a new Security out of an existing collection of credit assets. It is the process of taking an illiquid asset, or group of assets, such as a portfolio of receivables and, through financial intermediation, transforming them into a security or tradable financial obligation.
Securitisation is a Risk Transfer technique that appeared in the US at the beginning of the 80s. In a securitization, a bank’s exposure to credit risk is transferred into a Special Purpose Vehicle (SPV) that issues securities to a broad array of investors. These securities are typically rated by rating agencies although some asset securitisations are private placements involving non-rated securities. Such techniques are used in many jurisdictions and encompass a wide range of credit exposures including for instance residential mortgages (mortgage-backed securities), corporate loans and credit card receivables. Although initially used to transfer credit risk, securitization techniques are also used by large banks as an alternative way to raise funding.
- Investors use securitization to obtain access (invest) in credit assets
- Originators may use securitization as part of their Credit Portfolio Management tools
A securitization structure is a fairly elaborate setup that displays a varying risk profile to the different parties involved. For the investors in securitization bonds (tranches) the list of principal risk factors includes a combination of the following
To the extend that investors rely on their own or third party analysis and tools for assessing credit risk they may be further subject to Model Risk
Issues and Challenges
- Incentives of the agents involved in the securitization pipeline
- Availability of data for risk analysis
- Transparency of structure
- Quality of third party risk assessments