Defined as the packaging of multiple illiquid assets into a single security, securitization offers a number of advantages for financial institutions. Securitization enables financial institutions to remove assets from their balance sheets, a process that can improve economic performance measures such as return on equity. Securitization also reduces borrowing costs of financial institutions and decreases regulatory minimum capital requirements for banks, allowing them to free up more capital for outside transactions.
In addition to freeing up capital, securitization represents a way for financial institutions to diversify their funding sources and eliminate mismatches in interest rates. By packaging firms into a single securitized asset, financial institutions can create a long-term fixed rate investment option and pass significant market risk to investors. Securitization also enables investors to make decisions based solely on the structure of the investment vehicle, and not necessarily on the credit standing of the originator.