3. What is Securitization?
• - Converts future loan repayments into
tradable investments
• - Provides banks with immediate cash flow
• - Enables more lending and liquidity in the
financial system
4. Structure of Securitization
• 1. Asset Pooling: Collection of similar loans
• 2. Special Purpose Vehicle (SPV): Separate
entity that holds these loans
• 3. Tranching: Dividing the loan pool into
different risk categories
• 4. Issuance of Securities: Selling these
tranches as investment products
5. Key Participants in Securitization
• - Originator: Bank or financial institution
issuing loans
• - SPV: Special Purpose Vehicle that holds and
manages the loans
• - Investors: Buy the securities and earn returns
from loan repayments
• - Credit Rating Agencies: Evaluate and rate the
securities
• - Credit Enhancers: Provide additional security
(e.g., insurance, guarantees)
6. Risks in Securitization
• - Credit Risk: Borrowers may default on loan
repayments
• - Prepayment Risk: Early loan repayments
reduce expected returns
• - Liquidity Risk: Difficulty in selling securities
quickly in the market
• - Systemic Risk: Excessive securitization can
lead to financial instability
7. Regulatory Challenges
• - Risk Retention: Originators must retain a
portion (e.g., 5%) of the securitized assets
• - Transparency & Disclosure: Detailed
information on loan quality and structure
must be shared with investors
• - Credit Rating Oversight: Enhanced oversight
to prevent misleading ratings
• - Capital Requirements: Banks must hold
sufficient capital (as per Basel III) against risky
assets
8. Real-Life Example – U.S. Financial
Crisis (2008)
• - Subprime Mortgage Crisis:
• - Banks issued high-risk mortgages
• - Mortgages were pooled and securitized as
MBS
• - When borrowers defaulted, the securities
lost value
• - Outcome: Led to widespread financial
instability and a global crisis
9. Real-Life Example – India (HDFC)
• - HDFC Securitization Example:
• - HDFC pools home loans and sells them to
an SPV
• - The SPV issues securities (with different risk
levels) to investors
• - HDFC gets immediate cash to issue more
loans
• - Key Point: Regulatory measures ensure
transparency and risk retention, keeping the
process safe
10. Summary & Conclusion
• - Securitization: Converts future loan
repayments into immediate cash
• - Structure: Involves pooling, SPVs, tranching,
and issuance
• - Risks: Include credit, prepayment, liquidity,
and systemic risks
• - Regulatory Measures: Ensure transparency,
proper risk retention, and sufficient capital
buffers
• - Takeaway: While securitization is a powerful
![Securitization: Structure, Risks, and
Regulatory Challenges
• How Future Loan Payments Become Today’s
Cash
• Presented by: [Your Name]
• Date: [Presentation Date]](https://image.slidesharecdn.com/securitizationpresentation2-250727184437-6f0d8e0a/85/Securitization_Presentation-2-pptx-aaaaaaa-1-320.jpg)
