Question

What would you expect to be the relationship between securitization and the role of financial intermediaries in the economy? For example, what happens to the role of local banks in providing capital for mortgage loans when national markets in mortgage backed securities become highly developed?

Short answer

The importance of the financial intermediaries becomes insignificant.

Step-by-step solution

Definition

The process of bundling the large quantities of assets into pools by buying it from originators for trading like any other financial asset is known as Securitization Financial intermediaries are those financial institutions who stand between the security issuing firm and the ultimate owner of the security that is the individual investor.

Explanation

With securitization, the importance of the financial intermediaries becomes insignificant as the transaction now happens after bypassing them.

When national markets in mortgage backed securities become highly developed, it will fund to the housing market without requiring that bank to make loan from its portfolio. In such a scenario, local banks must increase other activities such as providing short term equity etc.