Securitization as a System of Pooling Resources in the Area of Banking Essay

Securitization as a System of Pooling Resources in the Area of Banking and Finance Law - Essay Example This paper illustrates that non-liquid assets are resources, which could be freely traded in its present form and needs to be converted into another form of instrument for it to be accepted in the capital markets. A popular form of non-liquid asset is the mortgage loans, which could not be readily disposed but may be converted into securities through sale to Special Purpose Vehicles (SPVs) that issue bonds. Conversion of non-liquid assets to tradable securities such as bonds will allow banks to free some capital, which is tied up in the loans portfolio and allows for diversification of financial sources for business operations. Issuance of ABS also allows the originator to remove the non-liquid assets from its books of accounts in cases of true sale transactions, which in effect improves the financial ratio of the originator most especially in cases where it is bound to comply certain risk-based capital standards such as bank reserves. As a general rule, all the risk connected to the securities traded and purchased is transferred to the buyer. Unlike regularly issued bonds where security is based on the financial soundness of the issuing company, asset-backed bonds depend primarily on the funds or cash flows generated by the pooled assets which makes it less risky than the regular securities. This means that since the securities are backed by a specific pool of assets, ABS investors are, to some degree, protected from losing money if the originator of the bonds suddenly goes bankrupt. However, the very nature of ABS would not protect the buyer or investor when the transaction is flawed or vitiated. The degree of the risk involve shall be mitigated or aggravated by the system adopted in the transaction whether it is a true sale or a synthetic securitization.