Securitization: A Financial Innovation

Any form of financial innovation comes with a cost and benefit. A sound and efficient securitization market can be supportive to capital market and economy as a whole by providing lower cost of capital to the firms, better capital utilization, diversification of risk and transforming pool of illiquid security into tradable one. However these benefits need to be assessed with the cost they bring including excessive credit growth outside formal banking channel, heavy dependency on the rating agencies, complex products, and principle agent problem that comes from perverse incentive schemes. The current paper explains about the concept of securtization, its process, role in sub-prime crisis and its future.