Securitisation

Securitisation is the process in which a bank or other financial institution consolidates a well-defined group of loans it manages and issues a new security (a bond) for their cash flow.

At first, securitisation seems a bit of a mystical process, but it's actually not complicated. In short, what happens is that the bank selects a group of loans it has, adds up their capital, and hands it over to a special company created for this purpose. This company issues a bond for the aggregate cash flow of the loans added to it. Cash flow essentially means the interests paid on loans. These bonds are then subscribed by investors, thereby taking over the risk of the loans from the bank, but at the same time enjoying the interests granted to them by the bank. 

Converting loans into to securities frees up resources for the bank without canceling old loans. And the bank can issue new loans from the released funds.  Securitisation is therefore an effective asset for the banking system to finances the economy with a larger amount than before. That is why central banks also support this solution. The way of central bank support can be, for example, to create a transparent system for securitisation. With such a system, the risk of securitisation can be avoided or significantly reduced.

One of the reasons for the great financial crisis of 2008 was that the banks securitized their loans in a non-transparent manner. As a result, bonds were issued that were backed by high-risk loans. It also happened that bonds based on securitisation were securitised again and a new a bond was issued for them. When the debtors did not pay part of the original loans, entire bond chains lost their value. This caused heavy losses to investors, including other banks. 

In order to avoid such dangers, the central banks require the securitizer to provide very serious data. They also check that only loans of the same type and similar risk can be "bundled" and turned into to securities. 

In addition to the above, it is also stipulated that the bank must keep a part of the loans belonging to the given category. This is necessary so that the bank remains interested in maintaining the good quality of the loan portfolio. In addition, the decree essentially makes it impossible to issue multiple repackaged bonds, which are therefore difficult to evaluate. With all of this, they are trying to prevent chains similar to the one in 2008 from forming.