Securitization, like other forms of financial innovation, has costs and benefits
ID: 2808510 • Letter: S
Question
Securitization, like other forms of financial innovation, has costs and benefits associated with it. There are conditions under which securitization can be a net benefit for the financial system and vice versa. As such, securitization as a concept is neither inherently good nor bad per se-a point under- scored by the marked variation in the performance of different classes of securitized assets during and after the global financial crisis (GFC). This point of departure stands in contrast to some of the more polarizing views associated with securitization, which were advanced in the aftermath of the GFC. 11. What are the "costs: associated with securitization that the quotation is referring to?
Explanation / Answer
11.
Securitization of assets is not bad if monitored properly. It brings in liquidity to the financial market.
Since securitization leads to complex structured investments, there are lot of costs involved due to this inherent complexity of these structured assets and the monitiring its requires.
Please see below the list of costs involved:
1. Interest cost of debt
2. Underwriting fees or Issuance expenses
3. Fee paid to rating agencies
4. Instrument Structuring fees
5. Legal / Accounting / Tax advisory fees
6. Admin fees / Reporting fees / System and Management costs
7. Costs of credit enhancements or tranching
etc