On The Functions Of Asset Securitization In U.S. Commercial Banks

On the Functions of Asset Securitization in U.S. Commercial BanksAsset securitization is the most important and influential one of the largest financial innovation in the financial world during the latest half century. Ever since the birth of it, it had been constantly studied, deepened, practiced, and re-innovated, and the results achieved is quite remarkable. Asset securitization was given the birth by the United States financial institutions and was soon spread to other countries and regions in the world with broad applications, and deep research. Needless to say, the reason being that asset securitization has its own features and benefits. Commercial banks are the most important parties in the financial system, and play an important role in the process of asset securitization. The functions of asset securitization are very important to commercial banks in the area of asset-liability management, financing and re-financing capacity, transfer of credit risk and regulatory capital arbitrage. This is the intrinsic reason for the United States commercial banks to involve, accept, and develop asset securitizations.The commercial activities of commercial banks are reflected in their balance sheets and off-the-sheets. In the course of business operation, it is great significance to manage the balance of sheets by adjusting the structure of assets and liabilities of commercial banks. Asset securitization, by using the illiquid assets as underlying asset to issue securities to be traded on the secondary market with complex structural design, enhances the liquidity of banks. This is an important way to improve the asset and liability structure. Mortgage-backed security is a typical example. It is a good way to see through the role of management of assets and liabilities by asset securitization. Compared with traditional management methods of assets and liabilities, asset securitization is better to solve the deadline mismatch, effective prevention of the liquidity risk, improvement of the quality of capital and the expansion of the scale of capital. Therefore, it is safe to say that Asset securitization is a better complement to the methods of management of the balance sheets in the commercial banks. But the attention must be paid to the desire and impulse of commercial bank to expand their business beyond their capacity to pay by securitizing large part of their asset to absorb bad loans in the application process. The crisis in 2008 has shown it was a bad idea. Risk awareness and cautious treatment of secondary market liquidity is always needed.Asset securitization is an efficient means of financing and re-financing, and is widely used in U.S. commercial banks as useful tools to enhance the financing capability, to lower the cost of financing, and to increase competitiveness under mixed financial systems in U.S. Asset securitization is an ever innovative financial instrument, with the ability to meet the diverse needs of investors of different risk tolerance. ABCP and SIV are the specific financing instruments always used by banks for financing and re-financing. Compared with the traditional method of financing instruments, asset securitization has advantages in the channel, cost, size and flexibility. Asset securitization can be said to be an effective strategy for commercial banks to enhance the financing capacity.Commercial banks are termed in most countries as a "risk machines", especially after the frequent outbreak of the economic crisis. Effective risk management and stable operation is crucial to commercial banks. Problem assets, through the creation of SPV, are sold to the SPV, and then be slice and repacked as new securities with different level of risk profile and different line of benefits. On one hand, risks and benefits are re-balanced and suitable for investors of different risk appetite. On the other hand, risks are blended and can hardly be recognized and traced when problems arise as shown in the 2008 crisis. In fact, risks can only be transferred but can never be eliminated. That is to say, Commercial banks transfer risks asset securitization but not to eliminate the real risks, the risks eventually can only be absorbed by the real economy. The process of risk transfer is actually the process of transfer of wealth. Individual risk transfer accumulates to increases the risks of entire financial system, which result in the outbreak of financial crisis.Under the regulations of financial regulatory authority In the U.S. and the provisions of Basel Community, commercial banks need to meet regulatory capital requirements in order to prevent risks. Asset securitization is used by the top ten banks in the United States to release regulatory capital. Asset securitization, compared with the traditional methods, is important way and widely used for regulatory capital arbitrage. It can release the required capital for risk prevention and increase the regulatory capital adequacy ratio. However, attention must be paid to prevent the excessive use of securitization of assets for required capital reasons, which has the potential to lead unfair competition between banks, and decline the asset quality in commercial banks.U.S. commercial banks have seen the widely application and significant development of asset securitization in the financial systems. The outbreak of the sub-prime mortgage crisis exposed some problems that can not be ignored. Emphasis needs to be paid on underlying asset quality, financial ethics, financial regulations and level of innovation. Asset securitization of commercial banks in China has just started. Commercial banks, as the core of our financial system, need financial innovation, especial asset securitization. From the point of view of competition, commercial banks in China need to use asset securitization as tools to solve the inherent problems and enhance competitiveness. Therefore, it is comparative to explore the path of asset securitization of China's commercial banks, which needs detailed analysis, research and consideration of the actual situation in China.