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The banks have been significant issuers of asset-backed securities. Question 17 options: True False

The banks have been significant issuers of asset-backed securities.

Question 17 options: True False

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Answer #1

Asset-backed securities are debt securities that have interest, and principal payments that are backed by underlying cash flows from other assets such as first mortgage loans, home equity loans, auto loans, credit card receivables, student loans, or equipment leases.

Thus, one incentive for banks to create securitized assets is to remove risky assets from their balance sheet by having another institution assume the credit risk, so that they (the banks) receive cash in return. This allows banks to invest more of their capital in new loans or other assets and possibly have a lower capital requirement.

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