IMPACT OF SECURITIZATION ON BANKING

abhishreshthaa

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IMPACT OF SECURITIZATION ON BANKING


It says securitisation is slowly but definitely changing the face of modern banking and by the turn of the new millennium, securitisation would have transformed banking into a new-look function.


Banks are increasingly facing the threat of disintermediation. When asked why he robbed banks, the infamous American criminal Willie Sutton replied "that's where the money is." No more so, a bank would say! In a world of securitized assets, banks have diminished roles. The distinction between traditional bank lending and securitized lending clarifies this situation.


Traditional bank lending has four functions: originating, funding, servicing and monitoring. Originating means making the loan, funding implies that the loan is held on the balance sheet, servicing means collecting the payments of interest and principal, and monitoring refers to conducting periodic
surveillance to ensure that the borrower has maintained the financial ability to service the loan.


Securitized lending introduces the possibility of selling assets on a bigger scale and eliminating the need for funding and monitoring. The securitized lending function has only three steps: originate, sell and service.


This change from a four-step process to a three-step function has been described as the fragmentation or separation of traditional lending.
 
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