Whole Loans vs Securitisation: Weighing the Options
Investors face a choice between whole loans and securitisation, each with its own set of benefits and risks. Whole loans offer higher returns, but they also come with increased risks compared to traditional securitisation.
Both whole loans and securitisation have emerged as alternative funding sources for financial institutions seeking to free up capacity on their balance sheets. This development has created new opportunities for investors, who must carefully consider their risk tolerance when deciding between the two.
Understanding Securitisation
Securitisation can be broadly defined as the process by which an originator pools loans and raises finance backed by those loans, with the security representing a claim on the income from the loans.
The Securitisation Process
The securitisation process involves three key steps:
- The originator identifies the assets to be removed from its balance sheet and pools them into a 'reference portfolio'.
A solid understanding of the pros and cons of each is essential to determine which option is more appropriate for the investor.
Author's summary: Investors must weigh whole loans and securitisation carefully.
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