What could the bank do?

A bank has a large number of auto loans and would prefer to sell them to raise cash for more funding. However, selling individual auto loans is difficult.

What could the bank do?
A . Package the loans into a securitized vehicle and sell the low risk portion of the portfolio.
B . Obtain a stronger credit rating so that the bank could borrow at a cheaper rate.
C . Set up a marketing team to sell individual loans to investors.
D . Merge with another bank.

View Answer

Answer: A

Explanation:

When a bank has a large number of auto loans and finds it difficult to sell them individually, it can take the following steps to raise cash:

Packaging into a Securitized Vehicle: The bank can package these auto loans into a securitized vehicle, such as a collateralized loan obligation (CLO) or an asset-backed security (ABS). By doing so, the bank can create a portfolio of loans that can be sold as a single security.

Selling the Low-Risk Portion: Once the loans are securitized, the bank can sell the low-risk portion of the portfolio to investors. This part of the portfolio is more attractive to investors because it typically offers lower risk and stable returns, making it easier to sell compared to individual loans.

References: This approach is detailed in "How Finance Works," where securitization is described as a method for banks to sell illiquid assets by packaging them into marketable securities??.