What is the function and significance of asset securitization?

Function; Because financial institutions themselves can maintain the required liquidity through asset securitization, the improvement of liquidity plays an important role in reducing the spread of financial institutions' crisis and thus improving the security of the national financial system. Moreover, asset securitization plays a very important role in guiding savings into investment and promoting the division of labor and refinement of the entire economic system.

At the same time, as a financial innovation product, asset securitization can build a bridge between relatively developed cities and relatively backward rural areas. Therefore, with the introduction of asset securitization laws and supporting measures in China, the innovation of asset securitization products will play an active role in the construction of new socialist countryside.

Meaning; Enhance the liquidity of sponsors' assets. From the initiator's point of view, asset securitization provides a means to transform a relatively illiquid individual asset into a highly liquid financial commodity that can be traded in the capital market. Through asset securitization, sponsors can supplement funds for other investments.

In order to obtain low-cost financing, asset securitization also provides sponsors with more effective and lower-cost financing channels. The cost of financing through asset securitization market is much lower than that through banks or other capital markets. There are also reducing risky assets and promoting asset-liability management.

From the perspective of investors, asset-backed securities provide higher returns than government-guaranteed bonds. This part of high income comes from many factors, but the most important thing is the credit quality of asset-backed securities. Asset-backed securities enrich the risk/return structure of investment products and provide investors with more choices of investment products.

Extended data

The development of asset securitization depends on three cornerstones: bankruptcy isolation, risk reorganization and credit enhancement. The establishment of bankruptcy isolation makes the risks of future asset securitization products out of touch with the original obligee, which not only protects the interests of investors, but also protects the interests of the original obligee.

Risk reorganization enables investors to achieve a reasonable match between investment risks and returns. Risk-averse investors can buy high-grade credit bonds with multiple principal and interest protection measures, but at the expense of low returns, risk-averse investors can buy high-yield bonds, but at the expense of low credit rating or even no credit rating, that is, high risk.

Credit enhancement enables the financing subject with weak credit to obtain funds at a lower cost by paying off the future cash flow of the underlying assets. This is especially meaningful for enterprises with low credit rating.

A basic principle of asset securitization is the law of large numbers. Only when there are a large number of scattered basic assets in the asset pool of asset securitization can we prevent the huge impact on asset cash flow caused by the default of a single asset, and also break the excessive dependence on the credit of the financing subject, so as to achieve the role of risk reorganization and credit enhancement.

Refer to Baidu Encyclopedia-Asset Securitization