Securitization
The process of pooling financial assets and selling their cash flows to investors as tradable securities.
What is Securitization?
Securitization is the financial process of pooling illiquid assets — such as mortgages, auto loans, credit card receivables, or student loans — and converting them into tradable securities sold to investors. The originator transfers the assets to a special purpose vehicle (SPV) that issues securities backed by the asset pool's cash flows. The securities are divided into tranches with different risk and return profiles: senior tranches receive payments first and carry the lowest yield; junior tranches absorb losses first but offer higher yields. Securitization allows banks to move assets off their balance sheets, freeing capital to make new loans, while giving investors access to otherwise inaccessible asset classes.
Example
A bank originates $500 million in auto loans, then transfers them to an SPV. The SPV issues three tranches: AAA-rated senior notes ($425M, 4.5% yield), BBB-rated mezzanine notes ($50M, 6.5% yield), and unrated equity tranche ($25M, 12%+ yield). Investors buy the notes; the bank receives cash to make new loans. Monthly auto loan payments flow through the SPV to investors in priority order.
Source: SEC — Asset-Backed Securities