Asset securitization has been recognized by eminent academics as the most important engine of reform in our financial system to emerge in recent times. In its simplest form, it is a process where ill-liquid assets owned by a financial institution, are pooled and sold to a third party. The SPV in turn, issues securities backed by these asset pools in financial markets to the general public, usually after obtaining some form of credit quality enhancement to the securities.
In a synthetic securitization, a financial institution holding a pool of assets transfers the credit risk attached to the asset pool to a third party. Such unbundling makes it possible to derive the benefits of specialization of functions and economies of scale. The benefits of this technique have been reaped by participants in the financial markets of developed countries, such as the United States, United Kingdom and those in Europe. The importance of developing financial markets as an impetus to overall economic development has been well documented.
The risks of borrowing in short term foreign currency markets was amply illustrated in the recent Asian financial crisis. One of the major problems constraining the economic development of emerging economies is the high cost of capital faced by firms. Securitization can be viewed as a form disintermediation, where institutions in need of funding can use the technique to directly access financial markets without the intermediation of commercial banks.
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