"Securitization" explains how asset-backed securities are created and discusses the various sources of their appeal to banks and investors that account for their spectacular growth and importance in bank lending.
- Define the following terms used in the reading:
- securitization
- asset-backed security
- pass-through security
- pay-through security
- What steps does a bank take to "securitize" a portion of its loans?
- What role do credit-rating agencies play in the securitization process? How can the credit quality of the loan pool be improved?
- How do lending institutions benefit from securitization? How are these benefits related to regulatory changes in banking and the process of financial innovation discussed in the Mishkin textbook?
- Why are asset-backed securities attractive to investors? How do they protect investors against default and prepayment risks?
Source: "Securitization." O. Emre Ergungor, Federal Reserve Bank of Cleveland Economic Commentary, August 15, 2003, pp. 1-4.
