Securitization helps banks make their retail assets highly liquid and their balance sheet easier to manage through the following mechanisms:
I: Accommodating Lack of Capital: By securitizing assets, any lack of capital can be accommodated by selling the securitized bonds. This process enables banks to raise funds quickly by selling bonds backed by their assets.
II: Diversifying Credit Risk: Banks can achieve credit risk diversification by selling their own securitized bonds and buying other bonds that increase diversification. This helps spread the risk across different types of assets and reduces the overall credit risk exposure of the bank.
III; Promoting Hedging: Securitization can be used to promote hedging by using limited market instruments.
By securitizing assets, banks can better hedge their positions and manage the risks associated with their assets more effectively.
References: These points align with the principles outlined in the "How Finance Works" document regarding the benefits of securitization for improving liquidity and managing balance sheets.