Banks and securitization.

Abstract

A financial technique able to use an asset to generate liquidity and profit even though it could not, this is what securitization is in a few words. With the use of this tool banks are able to sell assets not able to generate any income to a third party specially created to use the asset for issueing securities and sell them in financial markets. The first securitization transaction recorded in the U.S. in the 70s while it reached Europe in th 80s. Since then more and more banks in many countries are utilizing this financial innovation. Securitization reached its peak just before the recent financial crisis of 2008. In 2006 the volume of asset-backed securities issuance amounted to around 4 trillion dollars in the US and the European Union. The bursting of housing bubble in the US and the collapse of the subprime mortgage market initiated the most severe global financial crisis since 1929. Until the end of 2009, several banks in both continents had to heavily recapitalized with taxpayers’ funds, massive stimulus packages were put in place to avoid a repeat of the Great Depression and strong demands were heard for regulatory reform of the financial industry. The 2008 financial crisis led to the collapse of the entire banking system, plummet the stock market and caused a long period of recession. The effect of the financial crisis was global, and a large number of researchers focused on understanding the potential cause of the financial crisis, with many of them blaming securitization. The work presented in this thesis is about securitization and its development. The objective of thi dissertation is to identify the impact of securitization on banks. To do so, a systematic and comparative literature review is conducted. First of all, the term of securitization is presented along with the advantages and disadvantages that this tool brings to the banks and community. Then, the categories of the assets that can be securitized are described and explained in detail. The second chapter focuses on the process of securitization. All the steps and parties involved in this process are defined and alazyed. At this part, a brief explanation of why securitization takes the blame of the recent financial crisis is mentioned. The next chapter focuses on the securitization activities in Europe and how they developed over time. The last part of the thesis focuses on the existing literature, the market they are focusing, the period and the main outcomes of existing literature is presented. While in the final chapter an attempt to figure out what went worng with securitization and possible ways to avoid similar situations in the future is depicted.