Reasons for Undertaking Securitization

The driving force behind securitization has been the need for banks to realize value from the assets on their balance sheet. Typically, these assets are residential mortgages, corporate loans, and retail loans such as credit card debt. Let us consider the factors that might lead a financial institution to securitize a part of its balance sheet. These might be for the following reasons  

In other words, a bank will securitize part of its balance sheet is for one or all of the following reasons  

Banks use securitization to improve balance sheet capital management. This provides (i) regulatory capital relief, (ii) economic capital relief, and (iii) diversified sources of capital. As stipulated in the Bank for International 

To the extent that securitization provides regulatory capital relief, it can be thought of as an alternative to capital raising, compared with the traditional sources ofTier 1 (equity), preferred shares, and perpetual loan notes with step-up coupon features. By reducing the amount of capital that has to be used to support the asset pool, a bank can also improve its return on equity (ROE) value. This will be received favorably by shareholders. 

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