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Securitization: The Tool of Financial Transformation

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  • Frank Fabozzi
  • Vinod Kothari

Abstract

Securitization as a financial instrument has had an extremely significant impact on the world's financial system. First, by integrating capital markets and the uses of resources - such as mortgage originators, finance companies, governments, etc. - it has strengthened the trend towards disintermediation. Having been able to mitigate agency costs, it has made lending more efficient; evidence of this can be observed in the mortgage markets. By permitting firms to originate and hold assets off the balance sheet, it has generated much higher levels of leverage and, though arguably, greater economies of scale. Combination of securitization techniques with credit derivatives and risk transfer devices continues to develop innovative methods of transforming risk into a commodity and allow various market participants to tap into sectors which were otherwise not open to them. In its broadest sense, the term "securitization" implies a process by which a financial relationship is converted into a transaction. A financial transaction is the coming together of two or more entities; a financial relationship is their staying together. For example, a loan to a corporation is a financial relationship; once the loan is transformed into a tradable bond, it is a transaction. We find several examples in the history of the evolution of finance of relationships that have been converted into transactions. The creation of "stock," representing ownership in a corporation, is one of the earliest and most important examples of this process because of its impact on the growth of the corporate form of business organization. The process of converting loans to corporations of high credit quality corporate borrowers, and in the 1970s expanding that opportunity to speculative-grade corporate borrowers, into publicly traded bonds is another example of this. Commercial paper is another example of securitization of relationships as it securitizes a trade debt.

Suggested Citation

  • Frank Fabozzi & Vinod Kothari, 2007. "Securitization: The Tool of Financial Transformation," Yale School of Management Working Papers amz2495, Yale School of Management, revised 01 Jul 2007.
  • Handle: RePEc:ysm:somwrk:amz2495
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    File URL: http://icfpub.som.yale.edu/publications/2495
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    References listed on IDEAS

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    3. Ray Fair, 2009. "Has Macro Progressed?," Yale School of Management Working Papers amz2409, Yale School of Management.
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    Cited by:

    1. repec:bbz:fcpbbr:v:11:y:2014:i:6:p:1-21 is not listed on IDEAS
    2. João Pinto & Luís K. Pacheco, 2014. "The Economics Of Structured Leasing," Working Papers de Economia (Economics Working Papers) 04, Católica Porto Business School, Universidade Católica Portuguesa.
    3. Riachi, Ilham & Schwienbacher, Armin, 2013. "Securitization of corporate assets and executive compensation," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 235-251.
    4. Shojai, Shahin & Feiger, George, 2010. "Economists’ hubris – the case of risk management," Journal of Financial Transformation, Capco Institute, vol. 28, pages 27-35.
    5. de Mendonça, Helder Ferreira & Barcelos, Vívian Íris, 2015. "Securitization and credit risk: Empirical evidence from an emerging economy," The North American Journal of Economics and Finance, Elsevier, vol. 32(C), pages 12-28.
    6. Shojai, Shahin & Feiger, George, 2011. "Economists’ Hubris – The Case of Award Winning Finance Literature," Journal of Financial Transformation, Capco Institute, vol. 31, pages 9-17.
    7. Shojai, Shahin & Feiger, George & Kumar, Rajesh, 2010. "Economists’ hubris — the case of equity asset management," Journal of Financial Transformation, Capco Institute, vol. 29, pages 9-16.
    8. Sarai Criado & Adrian van Rixtel, 2008. "Structured finance and the financial turmoil of 2007-2008: and introductory overview," Occasional Papers 0808, Banco de España;Occasional Papers Homepage.

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