Securitisation is the process of pooling together assets, such as mortgages or credit card debt. Then packaging them into securities that are sold to investors. These securities, known as asset-backed securities (ABS), provide investors with a stream of income from the underlying assets.The purpose of securitisation is to transfer risk from the original holders of the assets to the investors in the securities. It is also to free up capital for the originators of the assets to use for further lending.
How does Securitisation work?
In securitisation, the originator of the assets, such as a bank or other financial institution, creates a special purpose vehicle (SPV) to hold the assets and issue the securities. The SPV is typically a trust or a limited liability company that is separate from the originator.The assets are transferred to the SPV in exchange for the securities, which are then sold to investors. The cash flows from the underlying assets are used to make payments to the investors.
Benefits of Securitisation
It can provide a number of benefits to both the originators of the assets and the investors in the securities. For the originators, securitization can help to free up capital that will be used for further lending. It can also help to manage risk by transferring it to investors.For investors, securitization can provide a way to invest in a diverse pool of assets, which can provide a higher level of diversification and lower risk than investing in a single asset. Additionally, securitization can provide access to a new class of assets and high-yielding investment opportunities.