Discuss Securitization in Financial Institutions Coursework (Coursework Sample)

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A securitization is a financial transaction in which assets are pooled and securities representing interests in the pool are issued. An example would be a financing company that has issued a large number of auto loans and wants to raise cash so it can issue more loans. One solution would be to sell off its existing loans, but there isn't a liquid secondary market for individual auto loans. Instead, the firm pools a large number of its loans and sells interests in the pool to investors. For the financing company, this raises capital and gets the loans off its balance sheet, so it can issue new loans. For investors, it creates a liquid investment in a diversified pool of auto loans, which may be an attractive alternative to a corporate bond or other fixed income investment. The ultimate debtors—the car owners—need not be aware of the transaction. They continue making payments on their loans, but now those payments flow to the new investors as opposed to the financing company
CREDIT RISK MANAGEMENT
Introduction
Credit risk is the current or prospective risk to earnings and capital arising from an obligor’s failure to meet the terms of any contract with the bank or if an obligor otherwise fails to perform as agreed.
Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions. Banks should also consider the relationships between credit risk and other risks. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long term success of any banking organization.
For most institutions, loans are the largest and most obvious source of credit risk; however, other sources of credit risk exist throughout the activities of a bank, including in the banking book and in the trading book, and both on and off the balance sheet.
Banks are increasingly facing credit risk (or counterparty risk) in various financial
instruments other than loans, including acceptances, interbank transactions, trad financing, foreign exchange transactions, financial futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees, and the settlement of transactions.
Policies relating to limits
Establishment of sound and well-defined policies, procedures and limits is vital in the management of credit risk. These should be well documented, duly approved by the board and strictly implemented by management. Credit policies establish the framework for lending and guide the credit-granting activities of the institution
An effective credit policy should outline the following:-
Defines the credit concentrations, limits and exposures the organization is willing to assume. These limits will ensure that credit activities are adequately diversified. The policy on large exposures should be well documented to enable banks to take adequate measures to ensure concentration risk is mitigated. The policy will stipulate clearly the percentage of the bank’s capital and reserves that the institution can grant as loans or extend as other credit facilities to any individual entity or related group of entities.
In the exposure limit, contingent liabilities sh...