Final answer:
Securitization offers advantages in avoiding financial vulnerability and providing liquidity to banks. However, credit default swaps are not directly used in the securitization process.
Step-by-step explanation:
Securitization offers certain advantages in the banking industry. One of the advantages of securitization is that it allows banks to avoid financial vulnerability if the local economy declines. By selling their local loans and buying mortgage-backed securities based on home loans from different locations, banks can avoid exposure to local financial risks. This helps to diversify their loan portfolios and reduce the impact of localized economic downturns.
Another advantage of securitization is that it provides liquidity to the banks. When banks sell their loans and convert them into mortgage-backed securities, they receive cash in return. This cash can then be used to provide new loans to borrowers, thus enhancing the banks' ability to generate new credit and support economic growth.
However, it is important to note that credit default swaps (CDS) are not directly used in the securitization process to give cash to bankers/loaners, guarantee new securities, create liquidity for the banks, or underwrite securities. Credit default swaps are financial instruments used by investors to protect themselves against the risk of default on their investments. They work like insurance contracts, where the buyer of the CDS pays regular premium payments to the seller, and in the event of a default on the underlying security, the seller compensates the buyer for their loss.