What do you Mean by Securitisation?

Securitisation is the financial practice of pooling various types of contractual debt, such as residential mortgages, commercial loans, or credit card debts, and selling their related cash flows to third-party investors as securities. This process converts illiquid assets into liquid ones, thus enhancing the market liquidity.

An Example of Securitization

One prevalent example of securitization is mortgage-backed securities (MBS). In this scenario, a bank bundles several mortgage loans and sells them to investors as MBS. The repayments from these mortgages then go to the investors in the form of periodic interest payments.

How Banks Use Securitisation

Banks use securitisation to free up capital, allowing them to issue more loans. By converting existing loans into securities and selling them to investors, banks can remove these loans from their balance sheets. This mechanism not only helps in risk management but also improves liquidity and productivity.

Is Securitization Good or Bad?

The impact of securitisation can be mixed. On one hand, it provides liquidity, diversifies risk, and frees up capital for further lending. On the other hand, improper management or lack of transparency can contribute to financial instability, as witnessed during the 2008 financial crisis. Thus, the effectiveness of securitisation largely depends on regulatory frameworks and market practices.

Securitisation in International Relations

In the context of international relations, securitisation refers to the process by which states transform subjects into matters of “security” to address threats. This theoretical concept, rooted in the Copenhagen School of security studies, shifts the focus from traditional military concerns to include political, economic, and social issues as security threats.

Securitisation in Banking

Securitisation in banking involves converting a pool of loans or other receivables into marketable securities. This practice allows banks to improve their liquidity by removing these assets from their balance sheets, transferring credit risk to external investors, and obtaining funds for new lending activities.

Securitisation vs. Securitization

The difference between “securitisation” and “securitization” is purely regional, with the former being the British English spelling and the latter being the American English spelling. Both terms refer to the same financial process.

Political Aspects of Securitisation

Politically, securitisation can affect how issues are perceived and addressed. For example, when climate change is framed as a security issue, it may attract more immediate political action and funding compared to being seen purely as an environmental concern.

A Practical Securitisation Example

A practical example would involve a commercial bank creating a special purpose vehicle (SPV) to manage and sell a portfolio of car loans. The SPV issues bonds to investors, which are backed by the cash flows from the car loans.

Securitisation Theory

Securitisation theory explores the process by which state actors transform subjects into matters of security. It originated from the Copenhagen School of security studies and essentially argues that security is constructed through language and practice.

Understanding Securitisation Vehicles

A securitisation vehicle is a legal entity created to purchase and manage a pool of assets and issue securities backed by those assets. These vehicles, often SPVs, are crucial for isolating financial risks and structuring the securitisation process efficiently.

Visualizing Securitisation: A Diagram

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