In the U.S., the size of investment assets started to overtake that of deposits sometime in the 1970's, so this relatively new trend sparked the need for financial institutions to improve the utilization of existing and future assets. In a well a functioning financial market, the information conveyed in prices plays an important role in helping to optimally allocate capital to its most profitable and ultimately most efficient use. When loan demand exceeds deposit growth, a financial institution is forced to consider several options such as raising deposits, sell or syndicate assets, borrow money from another lender, or securitize assets more commonly referred to as asset securitization. Since its development in the late 1980s, asset securitization has become the most desired option for building capital structure of many corporations. Finally, there are many ways in which financial institutions can raise capital, each of these alternatives have some advantages such as raising q!

uick capitol and receiving cash flows, but they also carry disadvantages such as risk for both the seller and investor. Asset Securitization is a tool that maximizes capitol and minimizes risk due to diversification.

Asset securitization over other methods of raising capitol;

Asset securitization differs from traditional bank financing, as the investor relies on cash flows generated from the specific assets being financed rather than the operating cash flows of the company. Securitization is the process of grouping assets in a "pool". This pool is then sold to investors who receive monthly payments of principal and interest from the pool. The investor typically gets a highly liquid investment that offers a yield in excess of most corporate bonds and still maintains a high credit rating. The seller gets capitol that could be used immediately rather then waiting until maturity of the assets that were sold. Moreover, asset securitization is certainly an optimal solution over the alternatives suggested earlier.

Asset Pools, quality, and diversification;

In principal any asset representing a claim to future cash flows can be securitized including non-performing. Asset securitized pools are typically "Mortgage-Backed Securities" containing assets of residential mortgages. Another type is combined "Asset-Backed Securities" containing assets such as credit card receivables, auto loans, or consumer installment loans. Pools containing a large number of securities tend to make the rate at which the principal is repaid more stable. "Asset-Backed Securities" shows little sensitivity to interest rate changes, as compared to "Mortgage-Backed Securities" which are highly sensitive. Mortgage loan backed deals frequently will require a range of $50 to $60 million in order to achieve adequate diversification. The quality of assets which will assemble the pool will determine the amount of credit enhancement. The issuer will need to have adequate financial capacity to support the representations and warranties that are necessary for securitization, so poorly capitalized companies generally are not good candidates for securitization. Small private placements can be executed for as little as $200,000 in out-of-pocket expenses. Larger or more complex deals can exceed 1 million dollars.

Benefits of the seller when considering Asset securitization,

The seller of the assets benefits by liquidating assets while still being able to continue to focus on core competencies rather then trying to compete in areas where they do not hold sterngths. The most important benefit to the seller is that it reduces capital and liquidity requirements, as assets are moved off balance sheets. Asset securitization provides access to a larger base of capital markets and institutional investors to fund assets. It also gives the seller the opportunity to retain the customer relationship and service. This is important since institutions will not have to turn customers away from continuing business. Other benefits include converting non-liquid assets to cash quickly, and it will achieve a cheaper