Financial Markets and Instruments - Essay Example

The resurgence in the volume of securitization over the past year has been attributed to factors like; The easing risks for finance companies: the risk factor of most US companies eased in 2013 which was characterised by upgrades on funding profiles, noncore assets liquidation, improved financial performance and an expanding market (Hu, 220).Another reason that has also led to the resurgence of securitization is low interest rates and the availability of funding which have encouraged finance entities to refinance their high cost debts and fund their growth initiatives (Kothari, 578).

Securitization has also been resurgent in the past year because it provides a liquid secondary market for illiquid assets like home mortgages and financial debt instruments, increases credit availability and offers low credit costs through low financing costs.Regulation has also played a role in the resurgence of securitization. With regulations that require stronger capital and liquidity positions for financial companies in the US, the consumer has been protected from the malpractices of investment bankers (Gaschler, 668).

These regulations have led to consumer confidence and in turn led to the resurgence of securitization. b) How have investment banks designed strategies for credit enhancement that have boosted securitization?Credit enhancement is a strategy used by companies to either improve the terms of their outstanding debt or credit worthiness, or both. Through credit enhancement, the credit worthiness of a borrower is increased while the lender is given reassurance that there will be no default. Investment banks have made use of both internal and external credit enhancement strategies to boost securitization (Powell and Rogers, 77).

External credit enhancement can be done through letter of credit, wrapped securities, cash collateral account and surety bonds while internal credit rating can be done through excess spread, over collateralization, reserve account and credit tranching. ReferenceGaschler, T. E. (2013). Understanding the securitization process and the impact on consumer bankruptcy cases. American Bankruptcy Institute, 7(12), pp. 667-680Hu, J. C., 2011. Asset securitization: Theory and practice. New Jersey: Wiley and SonsKothari, V., 2006. Securitization: The financial instruments of the future.

Hoboken, New Jersey: Willey and Sons. Powell, J. and Rogers, C., 2013. Where credit is due: Bringing equity to credit and housing after the market meltdown. US: University Press of America.