In short, securitisation is the transformation of income-yielding assets (typically
loans) on bank balance sheets into tradable securities. In its simplest form, the
originator, usually a bank, bundles a pool of loan exposures to pass them to the
capital markets. There are two main securitisation types, differing in terms of
how the credit risk is transferred to the capital markets.
In a true-sale securitisation, the originator passes the ownership of loans to another financial
entity, a special-purpose vehicle (SPV). In doing so, the loans are removed from
the originator’s balance sheet and the SPV becomes entitled to their cash flows.
Usually, SPVs finance the takeover by issuing bonds. Depending on the
underlying loans, there are subcategories of true-sale securitisations, such as
mortgage-backed securities (MBS) or asset-backed securities (ABS), which are
backed by auto loans, consumer loans, etc.
In a synthetic securitisation, the originator transfers the credit risk of the
bundled loans via credit derivatives or guarantees to the capital markets. The
loans themselves remain on the originator’s balance sheet. This is called a
balance sheet synthetic securitisation transaction (see diagram 2). In its
simplest form, this securitisation functions as a hedge against a loan default. If
there are defaults in the underlying loan portfolio, the seller of the credit
protection (i.e. Of the credit default swap (CDS)) reimburses the originator for the
For the loan portfolio protection, the originator pays a periodical fee (i.e.
CDS premium). Unlike a true-sale securitisation, the originator does not obtain
any funding or liquidity in such a transaction. There are also transactions where
the originator does not even own the underlying loans and holds the credit
protection only for arbitrage opportunities. This type is called arbitrage synthetic