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Banking Explained

When you put your money in a bank, the bank uses that money to make loans and investments.

Sometimes, the bank might take some of the loans they have given out and investments they’ve made and package them together into something called a “security.” They do this to raise funds to run their business.

But what exactly is securitisation and how does it work?

What is a “Security”?

A security is basically a bundle (group) of loans or investments that are sold to other people or organizations in order to raise money.

For example, let’s say that a bank has made various home loans to clients. The bank might take a bunch of those loans and bundle them together into a security called a “mortgage-backed security.” Then they will sell shares of that security to investors.

When someone buys a share of a bank security, they become part-owner of that bundle of loans or investments. They do this because then they’ll get paid a share of the profit that’s made from those loans or investments, either in the form of interest payments or dividends.

Used To Raise Money

Bank securities are just bundles of loans or investments that banks sell to investors as a way to raise money that they then use for other investments or costs.

What often happened in the past it that when the bank does this, they do not mention it to the people whose bonds are included in the security.

Then if the bond holder defaults on payments, it is normally the bank who comes and tries to collect. It can even be the bank who starts legal action against the person to try take back the property and auction it off.

And it is also said that the bank at the same time might claim some sort of insurance to cover their losses as a result of the missed payments etc.

The Big (Legal) Debate

Some people feel this is very unfair, and in fact, it should be the people who now really own the bond (as part of the security) who start legal action and not just the bank.

There have been many court cases about this topic and how securitisation impacts on who really owns consumer’s mortgages and who can and should collect on them when people miss payments. Around the world, these cases have had different outcomes and in some cases the bank is told they can’t take the person’s home and must start new legal action as the security and not just the bank.

 The whole topic of securitisation can seem somewhat mysterious and obscure, but as time goes by, more and more people are learning about this process and how the bank uses it to raise funds.

 These days, consumer rights are becoming more and more favoured, and the banks and investors are having to be a bit smarter and more open in what they are doing.