The process of securitization keeps getting popular in modern financial systems. In many countries the use of this method is an enormous stimulus for the progressive development of the financial market. Unlike the traditional methods of financing activity including shares, release of bonds, involvement of deposits and so on, securitization has some flexibility connected with early financial activities, transmission or redistribution of risks.
In the last decades the nature and tactics of financial intermediation have changed considerably.
As it is known, the main purpose of financial intermediation is the redistribution of financial resources of the economy, that is to say the recruitment of financial resources from people who have an excess of temporary financial resources and granting them to people who need financial means at that moment. This helps to guarantee the increase of the effectiveness of their usage. This whole process is organised through financial intermediate companies including banks, loan companies, economical incorporations, insurance companies, pension foundations and other structures of the financial market( to be precise, only the category of banks will be used in the article).
Formerly, banks would receive financial resources through investment of deposits, releasing certain securities including shares and bonds. But over time, because of the increase of the risk of their activity, bodies controlling and regulating financial field of countries( usually these are central or national banks) began to present new requirements(normatives) for the activity of those bodies, which itself led to the increase of the expenditure of the capital. Besides, banks which aimed these means at crediting of the population or organisations, had to wait for the deadline of the deposit in order to get back their means and secure the continuity of their performance.
The aforementioned circumstances compelled banks to search for new and cheap sources for the integration of financial means, which resulted in the formation of securitization process.
The process of securitization began in 1970s in the USA with the insertion of the securitization program of mortgage loans. Initially, the investment of the securitization of assets was to provide entities, who had a need of apartment, with cheaper mortgage loans, thus making it accessible for a larger circle of population.
Now let us see what securitization is. There are different approaches to the definition of securitization. Securitization is a structural financial method, where different financial assets are transferred to the Special Purpose Vehicle(SPV), which then releases a security secured only with transferred assets and the payments expected from those assets.
Chart 1: The Simplified Diagram of the Securitization Process
In other words securitization is the financing or refinancing of profitable assets released by debentures or other securities making them tradable[i].
According to the legislation of RA, securitization is a process, through which the initiator or the seller sells assets to the securitization foundation with all the rights for transferring the assets, and the securitization foundation releases securities secured with already bought assets and the money obtained from those assets[ii]. The process of securitization is shown in a simplified way in chart 1.
There are various financial instruments used in securitization including shareholder certificates, collateralized mortgage obligation, securities with personal mortgage security, and so on, but generally based on structural characterisitcs we differentiate 2 groups, pass-through and pay-through securities.
In case of pass-through instruments it’s the people, who have mortgage loans, who take the responsibility to the ultimate investors and not the securitization foundation. That is to say, the latter from time to time pay the main money and the interests to the bank. Banks pay the remained money to the SPV while keeping the commission fee to themselves. The latter collects the fees connected with this and other mortgages and transfers them to the investors.
In case of pay-through instruments the SPV releases bonds secured with bought assets and sells them to the investors. That is to say, in this case the SPV bears direct responsibility toward the investors and pays interests in the terms established by the bond, and at the end of the term pays the main money. In case of people who have mortgage loans, their payments are transferred from the bank to the SPV. If the SPV does not accomplish his obligations toward the investor, the latter have the right to receive the fees of the mortgage.
Securitization has developed in 3 stages
- MortgageBackedSecurities – MBS
- Asset Backed Securities – ABS
- Future Flow Securitisation – FFS
In case of mortgage backed securities the SPV buys loans from loan providing companies, groups them according to loan risk, releases corresponding securities for each group (bonds, commercial paper and others), and sells them to different investors, including investing companies, investing, pension fund organizations, brokerage and dealer firms.
There are 2 types of MBS, pass-through instruments and Collateralized Mortgage Obligation – CMO, which belong to pay-through instruments.
Asset Backed securities include not only the securitization of mortgage, but also securitization of other assets providing future monetary flows (car mortgage, house and trade mortgage, corporate mortgage, royalties, leasings, problematic receivables). It is clear from the definition that MBS are a type of ABS. The difference is that in this case securities are provided with several types of assets.
Unlike traditional financial methods, securitization enables banks receive financial resources faster and again directs them to crediting, providing high benefit. Second banks’ assets can not be liquidated and sold, while their unification and the creation of new financial asset solve the problem instead. Besides this, it allows to clear one’s balance from risky assets, as a result of which the rank of banks given from rating agencies grows.
From the point of investors, securitization provided with relatively good assets, is capable of resisting economical ups and downs.
[i] ‘Securitization of assets in Europe’, Հ. 7-րդ, AEPLAC, Երևան 2006,
[ii] RA law about ‘the securitization of assets and and securities provided with assets’, ՀՕ-96-Ն, 12.07.2008,
Author: Nelly Zakaryan ©All rights are reserved.
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Translator: Liana Papyan