Here are the key pros and cons of securitization:
PROS:
- It allows originators to transfer risk to investors, improving their balance sheets and enabling more lending.
- It creates liquidity in the market as securitized assets are easily traded. This provides a steady source of funding.
- It can lower borrowing costs for consumers as originators pass on some of the savings from cheaper funding.
CONS:
- Complex securitization structures can obscure risks, leading to mispricing and bubbles.
- Originators may reduce screening standards to boost volumes, lowering overall asset quality.
- Securitization can encourage excessive risk-taking as originators pass risks to investors.
- Boom and bust