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CFA Level I · CFA Level I Exam · Fixed-Income Securitization

Which of the following is the most likely benefit to the economy of the securitization market?

The most likely economic benefit is lower borrowing costs because securitization moves funding from banks directly to capital market investors. This disintermediation lets originators recycle capital and lend more. Credit enhancement is still needed, and credit risk is generally transferred to investors rather than kept by the banks.

  1. AIt removes the need for credit enhancement on loans
  2. BIt guarantees that the originating banks will retain all loan credit risk
  3. CIt lowers the cost of borrowing by moving funding from banks directly to capital markets investorsCorrect

Explanation

Securitization allows borrowers to access capital market funding, often reducing disintermediation costs and borrowing rates, and lets banks recycle capital. Credit enhancement is still used, and securitization generally transfers rather than retains risk.

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