Securitization

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  • The transformation of illiquid assets into securities through financial intermediation (usually a depository institution or investment banker). These securities are otherwise known as asset-backed securities, for example, mortgage-backed securities (MBS) or mortgage pass through. In this form of finance, debt instruments are usually aggregated into a pool (risk consolidation) that backs the issue of new securities to investors.

    Securitization through financial intermediation enables financial intermediaries to raise capital to lend to their customers while minimizing risk of default as a result of inadequate collateral. Principal and interest payments are channeled to the holders of the securities.

    Securitization enhances liquidity by converting long-term illiquid investments into liquid securities. These securities normally have an active secondary market and could be used to back other securities. They are usually denominated ...

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