Asset Securitizaton
125730022860000
FINC 3018
Bank Financial Management
Individual Assignment
Name: Duncan Oberg
SID: 310196302
Room: Storie Dixon 4 (N431)
Time: Thursday 5pm
Executive Summary
Asset securitization played a crucial role in the onset of the 2007-2008 sub-prime mortgage crisis, which inevitably aided in the creation of the worst economic conditions since the Great Depression. The nature and structure of securitized assets was not however what directly contributed to the Global Financial Crisis. These assets were reasonably new to the financial institutions and there was a limited understanding in pricing them. Along with this and record low interest rates, a profit motivated investor pool and increasing housing prices, securitized assets were at the forefront of the collapse of US and global markets in 2008. This report outlines the different types of asset securitization techniques, the risks involved in utilizing these mechanisms, impact that securitized assets had on the Global Financial Crisis of 2008 and the future of securitized.
Types of Asset Securitization
Originally asset securitization was developed in the 1970’s as a result of government-sponsored programs to enhance the liquidity of the residential mortgage market. It involves the pooling of assets by financial institutions in order to reissue them to investors on the secondary market. Financial institutions utilize securitized assets in order to hedge their risks as well as increase liquidity, which leads to the freeing up of capital to further invest and loan.
Underlying assets are removed from the balance sheet of the financial institution through the establishment of an entity called a Special Purpose Vehicle (SPV). As seen in figure 1 below, the SPV buys a pool of assets from the asset originator (financial institution) in order to sell to capital market investors on the secondary market. The SPV finances the initial purchase of assets by using a line of credit. Money raised from the
FINC 3018
Bank Financial Management
Individual Assignment
Name: Duncan Oberg
SID: 310196302
Room: Storie Dixon 4 (N431)
Time: Thursday 5pm
Executive Summary
Asset securitization played a crucial role in the onset of the 2007-2008 sub-prime mortgage crisis, which inevitably aided in the creation of the worst economic conditions since the Great Depression. The nature and structure of securitized assets was not however what directly contributed to the Global Financial Crisis. These assets were reasonably new to the financial institutions and there was a limited understanding in pricing them. Along with this and record low interest rates, a profit motivated investor pool and increasing housing prices, securitized assets were at the forefront of the collapse of US and global markets in 2008. This report outlines the different types of asset securitization techniques, the risks involved in utilizing these mechanisms, impact that securitized assets had on the Global Financial Crisis of 2008 and the future of securitized.
Types of Asset Securitization
Originally asset securitization was developed in the 1970’s as a result of government-sponsored programs to enhance the liquidity of the residential mortgage market. It involves the pooling of assets by financial institutions in order to reissue them to investors on the secondary market. Financial institutions utilize securitized assets in order to hedge their risks as well as increase liquidity, which leads to the freeing up of capital to further invest and loan.
Underlying assets are removed from the balance sheet of the financial institution through the establishment of an entity called a Special Purpose Vehicle (SPV). As seen in figure 1 below, the SPV buys a pool of assets from the asset originator (financial institution) in order to sell to capital market investors on the secondary market. The SPV finances the initial purchase of assets by using a line of credit. Money raised from the
References: Books Lange et al, Financial intuitions management, McGraw-Hill Australia Pty Limited, 2013 Websites Organization for Economic Co-operation and Development (2011), “Financial Market Trends”, Volume 2011 Issue 1, http://www.oecd.org/finance/financial-markets/48620405.pdfBarnes, Ryan (2009) “The Fuel That Fed The Subprime Meltdown”, Investopedia http://www.investopedia.com/articles/07/subprime-overview.aspRBA, Asset Securitization in Australia,