Securitization transforms illiquid assets into tradable securities from "summary" of Financial Markets and Institutions, Global Edition by Frederic S. Mishkin,Stanley G. Eakins
Securitization is a financial process that involves transforming illiquid assets into tradable securities. Illiquid assets are those that cannot be easily bought or sold on the market due to their unique characteristics or lack of ready buyers. By securitizing these assets, financial institutions are able to convert them into securities that can be bought and sold on the open market. This process typically involves pooling together similar types of illiquid assets, such as mortgages or auto loans, and selling shares of this pool to investors. These shares represent a claim to the cash flows generated by the underlying assets, allowing investors to earn a return on their investment. By securitizing these assets, financial institutions are able to free up capital that would otherwise be tied up in illiquid investments. One of the key benefits of securitization is that it helps to increase liquidity in the financial markets. By converting illiquid assets into tradable securities, securitization allows investors to easily buy and sell these assets on the open market. This increased liquidity helps to reduce the risk of investing in these assets, as investors are able to exit their positions quickly if needed. Additionally, securitization can help to diversify risk by spreading it across a larger number of investors. Instead of holding onto a single illiquid asset, investors can purchase shares in a pool of assets, reducing their exposure to any individual asset. This can help to improve the overall stability of the financial system by spreading risk more evenly across the market.- Securitization plays an important role in the functioning of financial markets by transforming illiquid assets into tradable securities. By increasing liquidity, diversifying risk, and freeing up capital, securitization helps to promote a more efficient allocation of resources in the economy.
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