Financial Institutions Management Essay Research Paper

Financial Institutions
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How securitisation has affected the institution of your choice prior and after the recession? - focus on impact of securitisation on risk levels, liquidity and profitability.
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Securitisation and Risk levels
Securitisation is the process of transforming an illiquid financial asset, non-negotiable payment, or income into a more liquid fixed-income security, whereby there is a transfer of the credit risk in organized markets. Royal Bank of Scotland (RBS) was one of the hardest-hit financial institutions by the recession as it was heavily leveraged. However, RBS now has the largest capital surplus of approximately £14 billion (Cruise and Withers, 2020). Securitisation was an incentive for financial leverage in RBS and other banking institutions that increased systemic risk where there was a misallocation of resources from the financial sector to the real estate sector financed largely through securitisation, especially in the US.
Securitisation affects the originator’s risk profile and financial strength as there is close linkage among entities and risk transfer. Starting in 2008, the financial crisis affected securitisation activity, and in 2010 issuance volumes fell in Europe. This reduction has been much lower than that registered in the United States, due to the fact that the euro area countries retained them on a large scale the securitisations used as collateral in Eurosystem credit operations. RBS was Britain’s biggest financial crisis failure where there were excesses and overreliance on debt for growth, which increased the institution’s risk profile credit and growth
The problems of information asymmetry and moral hazard resulting from Disconnect between the securitized portfolios of assets and their originator can lead to the appearance of loans of lower credit quality. The Bank’s exposure to global risk is likely increased because they ignored the investors and borrowers’ credit. RBS was incentivized to keep the riskier ones in their portfolio, where there was a likelihood of greater profits while relying on securitisation to improve the bank’s capital positions. There was a high default risk in the loans that RBS maintained in its books of accounts.Securitisation and liquidity 
Securitisation is one way to get more liquid assets, and while there had been reinvestment the liquidity obtained from securitisation, this changed after the recession. RBS issued loans backed by mortgage-backed securities (MBS), and when the customers failed to pay the monthly payments, the bank was left with huge debts. Long-term securitisations such as MBS covered most of the market, but still, the short-term papers were risky and increased liquidity when there were many transactions and high profits. The institution’s investment increased the risk of the asset portfolio as there was heavy investment in risky loans to customers. However, securitisation has a stabilizing effect when reinvestment focuses on diversification when the new assets are not highly correlated with the other assets. RBS failed to do this and had invested in risky assets, which had higher returns.
Securitization improved the bank’s ...