The securitization and structured credit markets have become critically importan
ID: 2811832 • Letter: T
Question
The securitization and structured credit markets have become critically important to the global ca markets, and thereby also to the world economies. The absence of well-functioning securiti markets negatively impacts consumers, banks, issuers and investors, resulting in lower econo activity and fewer than needed new jobs being created in the future. The price of credit is likely to be higher for the consumer and the availability scarcer. Banks will no longer have a tool to reduce risk and diversify their financing sources to free up capital for other activities. Investors will encounter rising difficulty in gaining exposure to an asset class that has become a significant part of their port- mic folios. 8. Explain why "securitization and structured credit markets have become critically important to the global capital markets, and thereby also to the world economies." Explain why the "price of credit is likely to be higher for the consumer and the avail- ability scarcer." 9. 10. For banks, explain why they "will no longer have a tool to reduce risk and diversify their financing sources to free up capital for other activities."Explanation / Answer
Answer 1
Securitization and stuructured credit market, commonly callled structured finance , has raise their own importance in the global capital markets because of their ability to satisfy unique needs of the investors. Strucutred credit allows corporation to avail credit and loans based on their highly specific needs that a simple loan will not be able to satisfy. Increasingly, in the global markets we can see that structured finance has been used to transform cash flows, reshaping liquidity and transferring risks.
Securitization, on the other hand, allows small retail investors to invest in certain assets with the use of large pool of funds which they might not be able to do otherwise. This increase the flow of funds in the economy and make it grow. For example, with the help of mortgage-backed securities, small retail investors can purchase portions of mortgage as a type of bond.
Answer 2
Without securitization and sturctured credit the cost of financing will raise. As they provide, financial institutions and corporations an oppurtunity to raise money from investors at a very low cost and in larger chunks. If the funds will not be available and then the supply of lending money will reduce and the same will increase the cost of lending.
Structured credit also solves the problem of having one facility as per specific needs, if structured credit is not available in such cases then the company has to avail multiple loans to create their own financial solution which is most costly and risky.
Answer 3
Structured financing is also used by financial institutions to clear their blocked funds and remove specific assets from their balance sheets. They also use it to manage their risk based on various securitization measures, expand their own reach and design new funding instruments.
Banks use such financing their portfolio's to reduce their risk and make themselves more funds available.
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