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Relation Between Securitization And The Financial Crisis

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A securitization transaction is widely used by the organizations in order to prevent any potential risk happen in their organizations. According to Senanayake (2010) on her books is Asset-backed securitization and the financial crisis stated that, securitization is the process of individual loan packaging and other debt instruments. Where the packaging process will be transfer as a security to improve a rating or credit status. While Davidson et al. (2003) stated that securitization is a process of packaging and transfer financial promises into form where it can be easily transfer to other investors. The value of financial promises is depends on the willingness and the ability of inndividual or company in term of making promises either good promise or bad promise. Securitization will become loans backed by general credit of the borrower and can become a securitization backed by legal obligations in term of forfeoture in certain asset and forcing in payment. In addition, according to Fabozzi & Kothari (2008) stated that securitization is also known as secured lending or asset based lending where there has a …show more content…

Credit enhancement is a process whereby basic collateral is used as a security to protect a potential risk and losses. Normally, credit enhancement is provided by external guarantors and the result of a security structure. External credit enhancement act as guaranty for all promised payments to the securities whereby it is also can be a third party of financial guaranty firm or be a corporate issuer of the security. While internal credit enhancement are created by subordinated on cash flow of the security or bonds to other senior obligations. To do it functions, subordinated has a difficult rules that need to describe the distribution cash flow. Normally, rating agencies has a responsibility to manage and create appropriate level of credit enhancement of each transaction (Davidson et al.,

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