Introduction to Securitization

SECURITIZATION AND FINANCIAL INTERMEDIATION

Let us take a closer look at the notion that securitization has resulted in financial disintermediation and there are benefits to an economy that result from financial disintermediation. The argument is that corporate borrowers can obtain funds directly from the capital market rather than from financial intermediaries such as banks. Assume a financial market that does not have a public debt market. That is, there is no market for corporate borrowing via the issuance of bonds. While our focus will be on the U.S. financial market, in some countries there still exists a very limited public market and in other countries public debt markets are relatively recent developments.

In the absence of a public debt market, all financial transactions involving corporate borrowing are done directly with a lender. Let us further assume that the potential lenders are individual investors and there are no financial intermediaries. In this scenario, there will be a direct lender-borrower relationship between the individual investor and the corporate borrower. The individual investor must have the ability to analyze the financial condition of the corporate borrower, prepare the legal documentation for the loan, service the loan, and, if the borrower fails to perform, institute legal proceedings against the borrower to recover the outstanding principal and unpaid interest for the loan. More than likely, an individual investor will not have the capability ...