Securitization of assets offers benefits to four categories of institutions. These institutions and their respective benefits are:
1.1. Benefits for Regulated Institutions
Following are the benefits of securitization for the regulated institutions:
a. Securitization helps in saving costs as a result of :
i. Low capital maintenance requirements
ii. Lower reserve requirements
iii. Lower deposit insurance premiums
b. The securitization helps in obtaining an additional source of funding, at a lower cost. The banks raise money from the Special Purpose Vehicles (SPVs) to fund the loans they offer and they can also sell these loans to them, according to their liquidity needs. The special purpose vehicles are typically rated higher than the original instrument.
c. This also increases the loan origination, making the higher credit availability for the consumers in the economy.
1.2. Benefits for the Economy
a. The economy has greater credit availability because of low cost and higher loan origination. The banks are also not limited by the risk concentration or capital.
b. The concentration of risk with the banks decreases due to securitization.
1.3. Benefits to the Investors
a. Investors get better risk-adjusted returns as a result of securitization.
b. They also have a better diversification of their investments.
1.4. Benefits to the Financial Markets
a. The financial markets get access to the liquid investment and payment streams otherwise unavailable.
b. The assets transferred by the banks to the SPVs have bankruptcy remoteness and are not subject to the risk faced by the bank. This is the reason; the SPVs carry higher credit ratings than the originator.
c. The markets also get a wider choice of an investment profile.