'Why do banks securitize assets?'

This white paper from the Bank of Spain (authored by Alfredo Martín-Oliver and Jesús Saurina) offers insights on how banks view the funding needs met by securitizations.  Although the 33 pages are at times highly technical, they provide perspective on the elements that covered bonds will need to address in order to compete as a funding supplement to securitizations.  Here is a portion of the abstract:

“Recent turbulences in financial markets underline the importance of understanding asset securitization, a process that allows banks to fund their credit growth and, potentially, to shed off credit risk and to arbitrage capital requirements. Similarly, recent turmoil has shown that the originate-to-distribute model might contain some perverse incentives for banks to lend and quickly package those loans and transmit the credit risk to third party investors. Our paper uses data of a country where securitization has been expanding at an exponential rate since the beginning of this decade and looks into the determinants of asset securitization for banks and the risks of the originate-to-distribute model. We distinguish between asset-backed securities (ABS) and covered bonds (with significant differences in terms of risk for the investor) so as to assess the relative importance of liquidity needs, risk profile and regulatory capital position of the bank in the securitization process.”

To download a PDF, click on the item under “Attachment” below.