Introduction to Securitization

KEY POINTS OF THE CHAPTER

• The concerns with securitization are (1) potential reduction in the effectiveness of monetary policy; (2) potential adverse impact on banks; (3) lax underwriting standards and poorly designed securities; and (4) increased opaqueness of bank risk.

• A major concern about securitization is that by allowing borrowers direct access to end lenders of funds could lead to the reduced role of banks in the financial intermediation process and less financial assets and liabilities held at banks such that it is more difficult for monetary authorities to implement monetary policy.

• Bank regulators have expressed the concern that because nonbank financial institutions are exempt from capital requirements, securitization will give them a competitive advantage in investing in securitized assets, leading to some pressure on the profitability of banks.

• Regulators have expressed concern that because securitization enables banks to lend beyond the constraints of the capital base of the banking system, there is the potential for a decline in the total capital employed in the banking system that would increase the financial fragility of not only a country’s financial system but also the financial fragility of the global financial system.

• There is a concern that the ability of lenders to pass along loans into the capital market via securitization has resulted in the abandonment of sound lending policies and motivating lenders to originate loans with bad credits.