Final answer:
Securitization helps local banks mitigate risk by allowing them to sell local loans and buy diversified mortgage-backed securities. It also packages debts into one financial product for investors. However, it can indirectly increase systemic risk if the underpinning debts are overrated by credit agencies.
Step-by-step explanation:
Which of the following are true of securitization? There are multiple aspects to consider regarding securitization:
- It allowed local banks to reduce their exposure to risk. By selling local loans and purchasing mortgage-backed securities that are based on loans from various parts of the country, banks can diversify their risk and are not solely dependent on the local economy.
- It involves packaging individual debts into a single asset. This process of pooling together various mortgages into a large financial security simplifies the investment for potential investors looking for a steady stream of income.
- It does not produce a single, uniform asset but rather a diversified one. And while it allows banks to manage risk, securitization might have indirectly increased the overall systemic risk when the credit ratings assigned to these securities were too lenient.
In conclusion, securitization involves the breaking down of large investments into smaller slices to mitigate risk, while pooling different debts into one financial product to be sold to investors.