Resecuritizations

Resecuritization is a financial process that involves repackaging existing asset-backed securities into new securities. This typically occurs when a financial institution holds a portfolio of asset-backed securities, such as mortgage-backed securities or collateralized debt obligations, and wishes to create new financial instruments from them. The original securities are pooled together, and then new securities are issued based on the cash flows generated by this underlying pool. This process can involve tranched structures, where different classes of securities are created with varying levels of risk and return, mirroring the structure of traditional securitization.

The primary motivations for re-securitization can include generating liquidity, managing risk, or creating more tailored investment products for investors. For example, a bank might re-securitize a portfolio of mortgages to free up capital for new lending. Investors may participate in re-securitizations to gain exposure to a diversified pool of assets or to invest in specific risk profiles that are not readily available in the original securities market. However, re-securitization can also introduce complexity and opacity into the financial system, making it more difficult to assess the underlying risks. The process played a notable role in the lead-up to the 2008 financial crisis, as the creation of complex re-securitized products, such as collateralized debt obligations (CDOs) backed by subprime mortgages, contributed to the spread of risk throughout the global financial system. Regulatory oversight and increased transparency are often key considerations when dealing with re-securitized instruments.