Chapter 4

A Primer on Securitisation

Securitisation has been an important technique in bank ALM from the 1990s onwards. Its use was curtailed significantly as a result of the financial crash of 2007–2009; however, as a balance sheet management tool it retains its value and importance in ALM for banks. For this reason we include a chapter on this subject in Part I of this book. We introduce the basic concepts of securitisation and look at the motivation behind its use, as well as its economic impact. We also illustrate the process with an hypothetical case study.

The Concept of Securitisation

Securitisation is a well-established practice in the global debt capital markets. It refers to the sale of assets, which generate cash flows from the institution that owns the assets, to another company that has been specifically set up for the purpose of acquiring them, and the issuing of notes by this second company to fund the asset purchase. These notes are collateralised by the cash flows from the original assets. The technique was introduced initially as a means of funding for US mortgage banks. Subsequently, the technique was applied to other assets such as credit card payments and equipment leasing receivables. It has also been employed as part of bank ALM, as a means of managing balance sheet risk.

Securitisation allows institutions such as banks and corporations to convert assets that are not readily marketable – such as residential mortgages or car loans – into rated securities ...

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