Securitization:
a strategic tool
Many
financial societies in the United States need securitization
to finance their activity. It is not rare, in this country,
for firms to be financed almost exclusively by securitization:
credit societies for example, that produce credits related to
credit cards and securitize the portfolio as soon as it reaches
a certain amount.
We can analyse this tendency as being a corollary of firms’
speciality. We know that the current tendency is subcontracting
or job sharing, and it is not a coincidence: in order to maximize
its profits, each firm determines its core business and it will
tend to get rid of additional activities. To give a rough example,
a bank does not have the vocation to run a restaurant. It will
then subcontract the activities of the firm’s restaurant
to a specialised society.
To some extent, securitization is also a revealing of this tendency.
The so-called American credit societies have decided that their
core business was the evaluation of the credit risk and the
credits risk-taking. We will say that the function of this firm
is the « origination » of credits.
In light of these facts, an indispensable additional activity
will collect the necessary funds to grant credits.
For this activity, we can consider the following models :
1st model: Fund-raising
on funds markets or by customers’ deposits, which means
that the firm is becoming a bank, with the following elements:
•
the balance-sheet of the firm increases progressively as the
new credits are being produced.
• the cash flow and the balance-sheet management will
have to take into account the different rates and the maturity
between sources of funding and the assets (Asset and Liability
Management (ALM))
• the financial management, from which depends the access
to the funding sources, will become another important component
of the activity.
To insure its activities, the firm will have to hire salaried
employees, buy expert systems and so move away from its core
business as it has been determined. It is not bad in itself
for we have described the birth of a bank here, but the core
business will start to be neglected, and the firm will have
to redefine its core businesses.
2nd
model: Systematic securitization of assets as
soon as they reach a certain amount:
• the size of the balance-sheet is still under control,
for as soon as an amount is reached, the assets are sold.
• the cash flow management is simplified by the agreements
made with important financial groups which cover the rate risks
during the time of preparation of the portfolio.
The society is therefore focused on the core business, and it
maximizes the profitability of its activity of credit risk-taking
by keeping the first risk on securitized portfolio (while protecting
itself from exceptional losses). Between those two extreme models,
an endless number of possibilities exists, but we notice that
the success of securitization is also, in a way, a consequence
of the increasing specialization of firms. The example above
shows how securitization is in fact an externalization of the
financial function of the firm.
We could also have taken the example of the management function
of assets portfolio: a firm which key function is the origination
of credits does not necessarily have to check the regular payment
of credits or to insure the recovery in case of shortage from
the borrower.
And yet this post also supposes the purchase of systems and
workforce that will not be used for the core business of the
firm.
Consequently, this activity can also be subcontracted. In the
facts, we actually notice that in the United States and in Great
Britain, it is very common for a bank to entrust, one day at
a time, the management of its credit portfolio to a third firm
which servicing accounts for the core business. In Europe, the
movement is more belated and the few specialized firms find
it difficult to be accepted.
