Understanding Securitisation: Concepts, Politics, and Practical Examples 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 … Continue reading Understanding Securitisation: Concepts, Politics, and Practical Examples