Securitization

Securitization is a financial process where different types of debt or other assets are pooled and converted into marketable securities. It turns illiquid assets, such as mortgages, loans, or receivables, into tradable securities that investors can buy and sell. This helps spread risk and creates new investment opportunities.

Example

A bank may have a portfolio of residential mortgages that it wants to remove from its balance sheet to free up capital and reduce risk. The bank pools these mortgages and creates a mortgage-backed security (MBS), which it then sells to investors. As homeowners make their monthly mortgage payments, the cash flow from those payments is used to pay the investors who own the MBS. Securitization can help financial institutions manage risk, improve balance sheet liquidity, and generate income from selling these securities.