Securitization, Regulation and Factors Contributing to Financial Crisis - Essay Example

This paper reviews the current financial crisis with focus on securitization, causes of the crisis, current regulatory framework and the scope of Basel Committee and proposes possible measures regulating the financial sector. The process of securitization and its significance Securitization refers to the transfer of assets from an entity, the originator, to another entity that is set for such purchases with the aim of increasing the generator’s liquidity level. The generator, a financial institution, sells its debt assets to the third party who in turn, provides agreed amount of cash in exchange.

The process of securitization incorporates a number of stakeholders. It begins with the financial institution that wishes to securitize its assets. The originator offers its assets to an issuer that must be an established entity for such a purpose and the issuer obtains rights over the assets. The issuer is further a native organization and acquires rights of the assets. Fundamental to the securitization process is the special purpose vehicle concept that transfers possession of the subject properties from the originator to the issuer and safeguards the issuer’s right over the property should the originator be declared bankrupt.

The process also involves the concept of “credit enhancement” where a ‘non-privity’ party guarantees quality of the involved credit that is then rated before securities are offered. Issue of notes that are structured before they can be offered in the market (Choudhry, 331, 332) accompanies the security offers. The process of securitization identifies diversified benefits to both originators and investors. The process facilitates the originator’s liquidity level by through funding that is derived from owned assets.

It therefore allows the financial institutions