There are significant risks when banks originate loans that they don't want to keep on their books. So why do banks persist with securitizing and selling off their loans?
By Eleanor Bloxham, contributor
There's a battle going on that goes to the heart of the financial crisis and the way banks will operate going forward. And it all comes down to risk.
It's time for banks to rethink the value of holding loans versus selling and securitizing them.
Why? Risk management. The risks associated with loan securitizations and sales are tangible. I've watched financial executives sweat because they originated subprime loans and couldn't get them off their books. I have also participated in economic valuation analyses that showed that when you took into consideration the full risks and costs of subprime loans, a bank was better off not making the loans if it didn't plan to keep them. That's because the risks and costs of the loans are significant. More
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