The Economics of Asset Securitization: Lessons for Commercial Banks in Emerging Economies

Abstract

This paper develops a simple model showing that market intermediation replaces the bank intermediation through the advent of new risk management techniques, institutionalization of savings, investor sophistication, decline in information and transaction costs in the securities market, specialization of financial services etc. Securitization is driven by these short and long run forces. Securitization is financial intermediation, both market and bank, in which the credit/loan from commercial banks and other lenders (such as, mortgages, loans, leases etc.) are replaced by marketable debt securities that can be issued at a lower cost. It is a new category of marketable securities that are collateralized by financial assets of banks, called 'asset-backed securities' and includes a process named 'securitizing'. Securitization involves forming a pool of financial assets so that debt securities can be sold to external investors to finance the pool. This system, which has been in operation in the Western economies, can also be suitable for emerging economies in Asia to protect banks from the pressure of open market operation. The skill and extend of asset securitization is the best way of survival for banks and being competitive in a complex business environment.