An analysis of the Product and Market functions of Asset-Backed Securitization (PDF)

Inhaltsangabe:Introduction:
In the past the basic concept of banking was when depositors were aspired to pay into banks or financial institutions which successively transferred these funds at a margin to individuals, businesses and credit worthy borrowers using methods of lending. The proportionate credit risk was the main apprehension of financial institutions that utilized existing functions and developed techniques to estimate the probability of these investors defaulting. In the 1980's significant technological advances assisted in the Securitization process, which enabled banks to hedge their credit-risk exposure by means of Securitization. Securitization was ranked amongst the big developments in the past years, like De-regulation, Globalization, Internationalization and the increasing permeation of technology.
¿Securitization can be defined as a process of packaging individual loans and other debt instruments, concerting the package into a security, and enhancing their credit status or rating.¿
¿Whereas the eighties were the age of securitization, one could describe the nineties as the age of asset securitization.[...] The worldwide issuance of assetbacked securities is expected to grow enormously in the future.¿
In the 1990's we have seen a notable shift from the traditional ¿loan financing¿ to Securitization of bank assets within financial markets. The ABS has and remains to be an important form of balance sheet financing for financial institutions. Securitization is a widely used mechanism by financial institutions which add value to investors/shareholders and stakeholders if implemented in it's eligible framework. Since the proposed Financial Services Modernization Act of 1999 came into effect, the Glass-Steagall Act of 1933 which previously imposed restrictions on the integration process of banks, insurance and stock trading was eradicated; consequently:
¿Boundaries between governments and markets were redrawn.¿
This enabled consenting bankers the liberty to utilize mechanisms, which imparted in trail-blazing structures being introduced into the market. Moreover, dexterous bankers who have the capability to understand the complicated nature or intricacy of these structures did use them for their benefit by exploiting lacunas or setbacks in both the product and market sphere of the system.
Hence, the focus of the paper will be to analyze the product functions namely, how the product was first initiated and the main incitement [...]