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Securitization - How Does It Work And Its Benefits?

What Is Securitization? Essentially, securitization refers to the process of creating asset-backed securities (ABS). By doing so, it pools the illiquid assets of a finance company (such as leases, loans, mortgages, and credit card debts) and converts them into highly liquid securities for sale to investors. It is theoretically possible to securitize any financial asset — that is, to convert it into a tradable, fungible item with a monetary value. This is essentially what all securities are. As a result, the financing companies can raise additional capital at cheaper rates than they could obtain through their commercial banks. They do this by releasing cash from assets on their balance sheets. In addition, this increases their loan book by lending their capital back to new borrowers.   How Does Securitization Work? The process of securitization generally has two steps. Step one: A company with loans or other income-producing assets (called “the originator”) identifies the assets they w