Securitization in banking
Titling in banking is the process through which banks group their assets with credit rights in financial securities issued in capital markets.
Credit rights are understood to be real estate loans, consumer loans or invoices issued and not settled, giving rise to a different securitization bond according to the credit right. Asset titling is usually carried out through a company, which is responsible for placing those assets with collateral or backing belonging to the banks.
Objectives of the degree in banking
Banks seek the title of their assets, mainly, for two reasons:
1. Diversify risk among investors, since this financial engineering process allows them to place their assets in the form of securities quickly and efficiently, transferring credit risk.
2. They seek to obtain financing and increase their business figures.
3. They become issuers and, therefore, can control the money in circulation of that securitized asset and can even manipulate the price and valuation of the securities in the market.
In many of the cases, assets have been securitized without controlling the risk of emissions and with totally erroneous credit ratings that have been the cause of serious crises worldwide, which is why the large international supervisory bodies must join forces and agree on the controls established in the titling of assets, from transparency in their valuation and price, to the reputation of the issuing companies and the information provided to the investor.
Advantages of the degree
The most important advantages of asset titling in banking are the following:
- It allows access to financial assets with greater ease and lower costs.
- Greater variety of investment to improve diversification and optimization of resources.
- They allow you to release your asset balances and thus meet capital ratios.
Disadvantages of the degree
The most notable drawbacks are the following:
- Risk of contagion due to the erroneous valuation of the securities.
- Lack of price transparency by issuers.
- Conflicts of interest between issuers and investors.
- Lack of independence of the rating agencies.