Asset securitization – difference of asset backed securities to traditional financing methods

Financing through securitization can be seen, most probably as one of the most important financial innovation in the second part of the last century. Explained in simple words, securitization allows depository institutions, finance companies and other non – financial institutions to obtain liquidity from non – tradable assets they own, that otherwise could not be sold in liquid markets but would remain on their balance sheet until their maturity. Within the securitization process, a company partially “deconstructs” itself by separating certain types of illiquid assets from the risks generally associated with the owning company and is able to obtain funds by using these in the capital markets at a lower cost, than if it could have raised the funds directly by issuing more debt or equity. This technic allows for credit to be provided directly to market rather than through financial intermediation. This article shall emphasize from theoretical perspectives the major differences of asset securitization to other similar traditional financing technics, especially to factoring, forfaiting and Pfandbrief. Factoring, traditionally used in the textile industries, and forfaiting, just like securitization involves a sale of receivables in order to generate cash. However, given the superficial similarities between these financing methods it is very useful to compare them and understand when each applies. In certain circumstances, the principles used in securitization and factoring may be even combined in order to obtain even lower capital than through either the innovating securitization or old line factoring