Final answer:
Securitization refers to the process by which banks bundle loans such as auto loans and sell them to investors as securities. This process off-loads risk and expands credit markets, but can also lead to financial crises if not managed properly, as seen during the 2008 financial crisis.
Step-by-step explanation:
When a bank bundles together a collection of auto loans and sells claims to principal and interest payments to a third party, the process is known as securitization. This practice is similar to the way banks securitized mortgage loans prior to the 2008-2009 financial crisis. Banks would sell their loans to financial institutions, which then created large financial securities called collateralized debt obligations (CDOs) by bundling together various types of debts, including subprime mortgages, auto loans, and credit card debt. These CDOs were then sold to investors who were expecting a return based on the borrowers' repayments. Securitization allowed banks to off-load the risk of the loans to investors and expand the credit market. However, excessive securitization and lenient credit ratings were among the main factors leading to the financial crisis.