Over the decade leading up to the financial crisis, securitisation was a rapidly growing segment of the financial sector globally and in Australia (Debelle, 30 November, 2010). Authorised Deposit Taking Institutions (ADI) uses securitisation as a medium to raise funds, as it accepts deposit and then make loans through indirect financing. Securitisation has been very popular financing option as banks use it to raise funds for finance. According to Reserve Bank, ADI uses securitisation for various reasons. The process of selling the loans to a third party, rather than retaining them on their balance sheet, enables them to manage their credit risk while continuing to maintain relationship with the borrower and also it frees up regulatory capital …show more content…
Prior to mid 2007, regional banks securitised around one-third of their housing loans while the major banks securitised less than 10 per cent. As a result, despite their smaller size, the regional banks accounted for roughly 40 per cent of Residential mortgage-backed securities issuance whereas the major banks accounted for 20 per cent (Debelle, 18 November 2009, pp.44).
The financial crisis had a negative impact on securitisation leading it to the residential mortgage-backed securities to have credit problems, which made the credit market more cautious. Because of the crisis, there was enormous loss incurred by US and euro area banks from their holdings of mortgage-backed securities. These losses have occurred despite the fact that securitisation was supposed to get the loans off bank balance sheets. They ended up back on the books, in large part because the banks had to bail out their SIVs (Debelle, 18 November 2009,pp.45).
Reserve Bank of Australia September 2009, Financial Stability Review, Sydney, viewed 13 August 2015,