Question

Why do lenders like to securitize their loans by selling them off and having them converted to asset-backed securities?

Check all that apply:
a) It reduces their risk.
b) It is legally required.
c) It allows them to do more lending.
d) It increases their profits.

Answer 1

Lenders securitize loans to reduce risk, recycle capital for additional lending, and increase profits, but it's not a legal requirement.

Step-by-step explanation:

Lenders like to securitize their loans and have them converted into asset-backed securities for several reasons. First, it reduces their risk, because by selling the loans, lenders can avoid exposure to financial downturns in a specific local area. Second, it allows them to do more lending, as they do not need to hold significant funds to create new loans; after selling the loans, they are free to lend again. Lastly, this process can increase their profits, as the sale of loans as securities represents an additional revenue stream and helps them to optimize their return on capital.

Although securitization can be advantageous, it is not legally required; rather, it is a strategic business decision that financial institutions make to manage risk and enhance profitability.