The market at a crossroads.
What is securitisation?
Securitisation is the pooling together of cash-generating assets, such as mortgages, auto loans or SME loans, created by banks and initially funded on their balance sheets, and funding these assets instead by issuing bonds in the capital markets.
These bonds are bought by a range of investors – typically banks’ treasury departments, insurance companies and a range of investment funds. The investors receive regular payments reflecting the interest and principal payments made by the underlying borrowers. Often, the bonds are divided into different tranches with different characteristics and varying levels of risk. The higher-risk tranches yield a higher return for investors.