Finance question – financial markets
Is there any potential effect of securitization upon financial markets?
The process of securitization involves pooling assets like mortgages, credit cards receivables and auto loans into one and then repackaging them as securities. Securities can be traded on the financial market for many purposes, including raising capital and providing liquidity to investors. This financing type has the main advantage of allowing companies to rapidly raise funds, without needing to either issue new equity or take on more debt.
Effective securitization requires transparency regarding the asset quality. Buyers need to be fully informed in order to assess risk. This can make financial markets more attractive as it can increase investor confidence which can result in higher liquidity levels and lower capital cost. Lack of transparency can result in market participation being reduced and even possible instability as a result.
Although securitization can offer many benefits, there are significant risks. This is why it must be properly managed to ensure it remains an effective way of raising money. Regulating and proper oversight is essential to this process. This allows all stakeholders access accurate information and allows them the ability to assess their risks before they sign any investment or transaction agreement.