Securitization: A Simple Guide to ABS and MBS. What Are They?

Finance can sometimes seem like a complex universe, far removed from everyday life. Yet, many of its mechanisms have a direct impact on our economy, the stability of banks, and even the ability to get a mortgage. One of these mechanisms, as powerful as it is controversial, is securitization. Although the term may sound daunting, the underlying concept is simpler than you might think. In essence, it’s about transforming loans and other receivables, which by their nature are not easily sellable, into financial securities that can be traded on the market.

Imagine a bank that has granted thousands of mortgages. Those mortgages represent enormous value, but it’s “locked up”: the bank will have to wait years, sometimes decades, to collect all the payments. Securitization allows the bank to “unlock” that value immediately by selling the loans to a specially created company, which in turn issues bonds to investors. This process frees up liquidity that the bank can use to grant new loans, thus fueling the economy. In this article, we will explore what securitization and its best-known products, Asset-Backed Securities (ABS) and Mortgage-Backed Securities (MBS), are, analyzing how they work, their advantages, risks, and their role in the Italian and European context.

What Is Securitization? A Journey into the Heart of Finance

To understand securitization, think of an orchard. The owner has hundreds of trees that will produce fruit for many years. Instead of waiting each season to harvest and sell, they decide to “bundle” the rights to the future harvests of a group of trees and sell them today to investors. In return, they get immediate cash to plant new trees or improve the orchard. Finance does something very similar: it takes assets that generate future cash flows (like mortgage or consumer loan payments) and transforms them into tradable “packages,” i.e., securities.

The technical process, regulated in Italy by Law 130/1999, involves three main players:

• The Originator: This is the entity (usually a bank or financial institution) that holds the original loans and decides to sell them.
• The Special Purpose Vehicle (SPV): This is a company created ad hoc for the sole purpose of purchasing the loans from the Originator. This company is a separate legal entity, protecting investors from a potential bank failure.
• The Investors: These are the ones who buy the securities issued by the SPV, betting on the original debtors’ ability to repay their loans. The cash flows generated by the loans (the payments made) are used to pay these investors.

This mechanism shifts the credit risk from the Originator to the investors, a model known as originate-to-distribute, as opposed to the traditional banking model of originate-to-hold.

• The Originator: This is the entity (usually a bank or financial institution) that holds the original loans and decides to sell them.
• The Special Purpose Vehicle (SPV): This is a company created ad hoc for the sole purpose of purchasing the loans from the Originator. This company is a separate legal entity, protecting investors from a potential bank failure.
• The Investors: These are the ones who buy the securities issued by the SPV, betting on the original debtors’ ability to repay their loans. The cash flows generated by the loans (the payments made) are used to pay these investors.

This mechanism shifts the credit risk from the Originator to the investors, a model known as originate-to-distribute, as opposed to the traditional banking model of originate-to-hold.

• The Originator: This is the entity (usually a bank or financial institution) that holds the original loans and decides to sell them.
• The Special Purpose Vehicle (SPV): This is a company created ad hoc for the sole purpose of purchasing the loans from the Originator. This company is a separate legal entity, protecting investors from a potential bank failure.
• The Investors: These are the ones who buy the securities issued by the SPV, betting on the original debtors’ ability to repay their loans. The cash flows generated by the loans (the payments made) are used to pay these investors.

This mechanism shifts the credit risk from the Originator to the investors, a model known as originate-to-distribute, as opposed to the traditional banking model of originate-to-hold.

Asset-Backed Securities (ABS): Beyond Mortgages

Asset-Backed Securities (ABS) are the broadest category of securities resulting from securitization. The term “Asset-Backed” literally means “secured by assets.” These assets can be of various types, as long as they generate predictable cash flows. It’s an extremely diverse universe that shows the flexibility of this financial instrument.

Any future cash flow that is sufficiently stable and predictable can potentially be securitized. From car lease payments to concert ticket revenues, finance has found a way to turn a wide range of economic activities into securities.

Some of the most common examples of underlying assets for ABS include:

• Auto loans: the monthly payments made by vehicle owners.
• Consumer loans: repayments of non-specific personal loans.
• Trade receivables: invoices that a company has against its customers.
• Lease payments: periodic payments for the use of an asset.
• Credit card receivables: future payments expected from cardholders.

The creation of ABS allows companies to finance themselves in a way that is an alternative to traditional bank credit, diversifying their sources of liquidity and improving their balance sheet management.

• Auto loans: the monthly payments made by vehicle owners.
• Consumer loans: repayments of non-specific personal loans.
• Trade receivables: invoices that a company has against its customers.
• Lease payments: periodic payments for the use of an asset.
• Credit card receivables: future payments expected from cardholders.

The creation of ABS allows companies to finance themselves in a way that is an alternative to traditional bank credit, diversifying their sources of liquidity and improving their balance sheet management.

• Auto loans: the monthly payments made by vehicle owners.
• Consumer loans: repayments of non-specific personal loans.
• Trade receivables: invoices that a company has against its customers.
• Lease payments: periodic payments for the use of an asset.
• Credit card receivables: future payments expected from cardholders.

The creation of ABS allows companies to finance themselves in a way that is an alternative to traditional bank credit, diversifying their sources of liquidity and improving their balance sheet management.

Mortgage-Backed Securities (MBS): The Building Blocks of Finance

Mortgage-Backed Securities (MBS) are a specific and very important type of ABS. As the name suggests, they are securities backed exclusively by a portfolio of mortgage loans, both residential and commercial. Historically, they were among the first instruments to be securitized on a large scale, originating in the United States in the 1970s to support the housing market and the dream of homeownership. Their operation is identical to that of other ABS: a bank pools a large number of mortgages and sells them to an SPV, which then issues MBS to investors.

These instruments, however, are inextricably linked to the fate of the real estate market and became infamous for the central role they played in the 2008 global financial crisis. In those years, banks began to issue subprime mortgages, which are loans to customers with high-risk profiles and poor collateral. These high-risk mortgages were then “packaged” into complex MBS and sold to investors worldwide. When the U.S. housing market collapsed and subprime borrowers stopped paying, the value of these securities plummeted, triggering a domino effect that led to the failure of major financial institutions and a systemic crisis.

The Securitization Market in Italy and Europe

After the 2008 crisis, the securitization market underwent a profound regulatory overhaul, with the introduction of stricter rules to ensure greater transparency and security. Regulation (EU) 2017/2402, for example, created a harmonized framework at the European level, promoting Simple, Transparent, and Standardised (STS) securitizations to help investors identify high-quality products. In Italy, supervisory authority is shared between Consob and the Bank of Italy.

Today, the European market is significant. In the second quarter of 2025, €78.9 billion of securitized products were issued in Europe, with the total outstanding volume exceeding €1,253 billion. In Italy, too, securitization is a well-established tool. The real estate securitization market, for example, reached €3.8 billion in 2025, with a growing number of special purpose vehicles. This instrument is proving useful not only for large banks but also for Small and Medium-sized Enterprises (SMEs), which can access new forms of financing to support growth and innovation. In a cultural context like the Mediterranean, traditionally tied to “brick and mortar” and tangible savings, securitization represents an innovation that challenges habits, transforming concrete assets like real estate into abstract, global financial instruments.

Advantages and Risks: Two Sides of the Same Coin

Securitization is a double-edged sword. If used correctly, it offers significant benefits to the financial system. If managed without due caution, it can generate significant risks. It is essential to understand both sides to get a complete picture.

Advantages for Banks and the Financial System

The main benefits for originators, such as banks, are clear. First, securitization provides immediate liquidity, turning long-term receivables into cash to be reinvested. This allows them to grant new loans to households and businesses, stimulating the economy. Second, it allows them to transfer risk to a wide range of investors, reducing the individual bank’s exposure. Finally, it improves balance sheet and capital ratios, helping banks meet regulatory capital requirements. For investors, it offers the opportunity to diversify their portfolios and obtain attractive returns.

Risks for Investors and Global Stability

The risks, as history has shown, should not be underestimated. The main danger is related to the quality of the underlying assets. If the original debtors do not pay, the value of the securities plummets, and investors lose their capital. Another risk stems from the complexity and lack of transparency of some structures, which can hide the true riskiness of the assets. This problem, known as information asymmetry, was one of the causes of the 2008 crisis.

According to the Bank of Italy, model risks and those arising from the misalignment of interests between those who manage the loans and the final investors are greater in securitizations than in other financial activities.

Finally, there is a systemic risk. If the securitization market is very large and interconnected, the collapse of one part of it can spread to the entire financial system, as happened with subprime mortgages. For this reason, supervisory authorities like the ECB and the Bank of Italy constantly monitor this market today.

Conclusions

Securitization is a sophisticated financial mechanism that has profoundly transformed the way credit is created, managed, and distributed. Instruments like ABS and MBS have made it possible to liquefy assets that were not liquid, freeing up crucial capital for the real economy and offering new investment opportunities. From large banks to SMEs, many economic players now use it to diversify their funding sources and better manage their balance sheets.

However, the 2008 crisis taught a fundamental lesson: the power of this tool requires rigorous regulation and impeccable risk management. The complexity, potential lack of transparency, and the risk of a misalignment of interests between those who originate the loans and those who buy them are real dangers. Today, thanks to a more solid regulatory framework in Europe and greater awareness, securitization continues to be a pillar of modern finance, a bridge between traditional savings and the innovation of global markets, where algorithmic trading and new technologies play an increasingly central role.

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