Financialisation and Banking

Financialisation and Banking 

Securitisation - Unal Azaoglu

Asset-backed securities are sold either with fixed rates of interest or with floating rates. One of the objectives was to secure the businesses and banks capital. The earliest known securitisations occurred in Denmark, where mortgage bonds have served to finance house purchases for many years. ¬ became widely used in US in 1970s. Securitisation involves transforming, or packaging, such assets into securities that can be sold to third parties. Trust between loaner and investment bank.  An investment bank not same with the commercial bank or retail banks, investment bank does not take deposit. Guarantees allow this trust to be formed. The guarantees on residential mortgages is usually given by the state, most of the time it is not the full amount.

-       MBS: Mortgage- backed security, which is a type of assetbacked security that is secured by a collection of mortgages.

Before the 21^st century, securitisation was the dominant financial strategy only within the United States of America. There was no laws that would either control or stop, these form of loans to be given by banks.

So firms and individuals took this advantage to invest in every innovation that could possibly be profitable. On the other hand countries such as Japan did not see a growth in these forms of loans, as they had laws intended to protect the rights of borrowers which in turn delayed the development of the securitisation of assets. Investment banks in the US also have strong faith in there statistical analyses, which they used to work out the value of the credit in terms of the secured asset.

However, in 1993 Japan began to permit securitisation as a means of allowing troubled banks to dispose of assets, such as property held as collateral for debtors who have defaulted. Securitisation had also seen a dramatic increase in supply throughout Europe. The first mortgage backed security in the UK was a £50 million issue for National Home Loans. When introduced in 1987 it brought with it steady growth. Although it was highly demanded due to the floating exchange rates made it difficult for UK’s mortgage banking system as many were not in the position to take a secured loan, due to the high cost they will incur. Mortgage-backed securities accounted for approximately 80% of the asset-back securities outstanding throughout the world at the end of 2008. Some lenders may attempt to securitise a large proportion of the securities they originate and hold onto few of them, giving them little incentive to make sure that the individual loan are sound. Unsound loans was a major contributor to the financial crisis that began in 2007, and caused large losses to both investors and the banks that originated the securities.  

After the 2008 financial crises securitisation saw a quiet period, however in 2014 it was back in the market. Not all economist put all the blame on securitisation, rather they blame the method used by banks. That is, they created securities backed by mortgages, then sold them to "investors" who ultimately relied on the banks themselves for funding, but were structured so that the banks could pretend this was not so.