, the size of investment assets started to overtake that of deposits sometime in the 1970's, so this relatively new trend sparked the need for financial institutions to improve the utilization of existing and future assets. In a well a functioning financial market, the information conveyed in prices plays an important role in helping to optimally allocate capital to its most profitable and ultimately most efficient use. When loan demand exceeds deposit growth, a financial institution is forced to consider several options such as raising deposits, sell or syndicate assets, borrow money from another lender, or securitize assets more commonly referred to as asset securitization. Since its development in the late 1980s, asset securitization has become the most desired option for building capital structure of many corporations. Finally, there are many ways in which financial institutions can raise capital, each of these alternatives have some advantages such as raising q!.
uick capitol and receiving cash flows, but they also carry disadvantages such as risk for both the seller and investor. Asset Securitization is a tool that maximizes capitol and minimizes risk due to diversification.
Asset securitization over other methods of raising capitol;.
Asset securitization differs from traditional bank financing, as the investor relies on cash flows generated from the specific assets being financed rather than the operating cash flows of the company. Securitization is the process of grouping assets in a "pool". This pool is then sold to investors who receive monthly payments of principal and interest from the pool. The investor typically gets a highly liquid investment that offers a yield in excess of most corporate bonds and still maintains a high credit rating. The seller gets capitol that could be used immediately rather then waiting until maturity of the assets that were sold. Moreover, asset securitization is certainly an optimal solution over the alternatives suggested earlier.