pooling and repackaging of similar loans into marketable securities that
can be sold to investors. Many
types of loans are currently being securitized:
residential mortgage loans, automobile, and other commercial loans.
Securitization is distinguished from whole loans and loan participations.
provides a process for improving the liquidity of assets and capital-to-asset
ratios while increasing earnings.
Fees obtained through securitization increase a bank's earnings.
Savings in regulatory costs and in economies of scale are also
possible. Securitization can
enable banks to reduce credit risks associated with variable-rate loans.
can result in the deterioration of bank assets because investors require
high-quality loans. The purchaser
must usually depend on the originator or some other party for servicing,
which can be a disadvantage.
D. Selling and Securitizing
Commercial Bank Assets, 1988.