Finance and Accounting

Finance and Accounting

Financial Markets and Instruments

securitisation

Question 1
At its inception in the 1970s, securitisation was considered a powerful financial innovation
that would increase the flow of financing for consumer durables, deepen capital markets,
diversify risk away from the banking system, create links between banks and capital markets,
and help fina
nce mortgages and consumer durables at a much larger volume that was hitherto
deemed possible. However, the experiences with sub

prime mortgage crisis, led to radical
changes in that perspective. Securitised products were deemed to be instrumental in creat
ing
and transmitting the crisis. As a result of these events, weak economic prospects and strong
regulation, securitisation declined dramatically between 2008 and 2012. However, there
seems to have been a dramatic revival in securitisation of assets over t
he past year (2013).
The trend is expected to continue into 2014.
Discuss the role of securitisation as an instrument of financing. In your response, describe the
agents involved in the securitisation process and their roles in the process. What, if any,
are
the conflicts of interest that may arise for each of these agents in fulfilling their assigned
roles?
(40 marks)
Question 2
Describe and analyse the risks faced by creators and investors of asset backed securities.
Conversely, securitisation also he
lps banks to manage some of their risks. Describe how
banks are able to use securitisation as a tool for managing risk. What are some of the
unexpected outcomes that have increased risk? How has this risk been transmitted through
the financial system?
(30
marks)
Question 3
Examine what factors have led to a resurgence in the volume of securitisation over the past
year. How have investment banks designed strategies for credit enhancement that have
boosted? In your response, delineate between regulatory in
itiatives and market determined
factors that have led to a resurgence in securitisation.
(30 marks)

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