Question

What are the pros and cons of securitizing loans and repackaging/reselling loan portfolios?

Answer 1

Securitization is a process of converting illiquid assets to liquid assets by selling the loans to third parties. Securitization is usually done by banks and financial institutions engaged in the business of lending loans.

Pros:

1. Assists in creating liquidity for the banks

2. Eliminates the risk of bad loans

3. Reduction in minimum capital requirements

4. Helps in diversification of the portfolio

Disadvantages of securitization:

1. Is a complicated process and involves multiple parties

2. Is an expensive way of selling the assets

3. May become difficult to raise funds in the future