Securitization And Disintermediation

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Before defining the term securitization we need to distinguish between the securitization and the disintermediation terms. Gardener and Revell (1988) stated that they have huge zone of intersection whereas each is on a diverse phenomenon. Disintermediation is the opposite of direct funding where the facilities of an intermediary are given up and the borrowers and investors transact directly with each other. The connection between both terms appears when the direct funding is undertaken in terms of tradable securities. One notable characteristic of securitization is the excessive rise in the issuance of the entire types of securities, the traditional and the novel ones. For distinction, what falls under the term securitization rather than disintermediation, for instance, is loan debt that is traded from an institute to another and known as an asset-backed funding. It is important to note that there are numerous diverse securities markets where the technique of securitization has helped to introduce novel securities and markets, satisfying the missing kinds; or as called filling the gaps. Generally, the impact of securitization is to segregate severe credit risk into credit risk that is devoted to numerous notes to be passed to a purchaser. However, commonly, the bank is left with a sort of obligation (Gardener and Revell, 1988).

An essential part in the originate-to-distribute model (OTD model/securitisation model) is that securities are valued by rating agencies. Regardless of the sophistication of securitization activity, the main concept behind it is that if the bank goes bust the SPV will not be affected. In other words, the SPV will not bust as the bank bankrupt. This is known as Bankruptcy-remote. Hence, the asset-backed ...

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...credit accessibility, borrowing costs and product alternatives (Taylor, 2009: 144). Furthermore, it is essential to keep in mind that in order for this entire process to function fully the SPV has to be bankruptcy remote from the bank and vice versa. Whereas, if this appeared not to be the situation, this means that the risk has not been shifted completely and the bank is yet left with some sort of liability. Nonetheless, in the period of financial crisis, the case was that an SPV may be bankruptcy remote from the bank, and the bank may decide to secure its status by backing up the vehicle either by purchasing again the securitised assets or by prolonging its loans in the occasion of a funding turmoil. This might be a selected choice in situations where the bank decides to over-securitise in the coming future for the sake of maintaining the securitization approach.

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