Converting Loans to Securities: Securitisation as a Financing Tool

Traditionally capital market financing (direct transaction between issuers and investors via a broker/dealer intermediary) is distinguished sharply from balance sheet intermediated financing (bank financing). But the distinction between loans and securities is not as sharp today as in the past as a result of techniques developed by financiers which enable loans to be converted into securities. In this chapter I examine how assets that a bank or other lender originates (i.e. loan arranging) can be converted into securities that are attractive to non-bank investors, such as pension funds, insurance companies, hedge funds and, importantly, non-domestic investors. Th is conversion process is one aspect of the disintermediation of the banking system which has been a critical development in the finance industry, particularly since the year 2000. Initially it brought considerable benefits to banks, investors and society but latterly it was fraudulently misused and became the central cause of the Western world’s bank financial crisis.