Securitization is a process whereby assets (e.g. Mortgages) are removed from the bank’s balance sheet and sold to a Third Party. The bank continues to service the assets and maintains direct relationship with customers. The third party then issues Securities to Investors. These Securities are backed by assets purchased from the bank. Investors invest in Securities and receive regular repayment from the third party. This repayment consists of interest during the tenure and principal at the end of maturity.
Third party can be a Special Purpose Vehicle (SPV) or Limited Liability Partnership (LLP) based on the Securitization need. Securities can take form of SecuritizationNotes or Covered Bonds based on the type of Securitization.
The basic structural flow of securitization:
ABS – Asset Backed Securities: Debt securities (bonds) whose performance is solely determined by the performance of an underlying pool of specified assets (collateral)
CMO – Collateralised Mortgage Obligation: A pool of mortgage loans used as collateral for ABS – the term is now used to refer to the bonds themselves.
CLO – Collateralised Loan Obligation: As above, but the assets are commercial loans, usually unsecured.
CBO – Collateralised Bond Obligation: As above, but the assets are bonds, typically high yield bonds or ABS
CDO – Collateralised Debt Obligation: Portmanteau term for CMOs, CLOs and CBOs
OC – Over collateralisation: Value of collateral in excess of the face value of the bonds issued against it: improves the risk of the bonds
Quick re-financing (funding) capability.
Ease the regulatory capital charge by moving assets off their books, resulting in less idle cash with the bank.
Ability to separate financial assets from credit, performance and other risks associated with the bank.
Securitization benefits the economy as a whole by bringing financial markets and capital markets together.